German inflation and French election drives borrowing costs across Europe

Economy - Mohit Shah - Jan 31,2017

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german inflation and french election drives borrowing costs across europe

On Monday, the cost of borrowing across Europe spiked due to German inflation statistics and French elections caused concerns whether central bank incentive could be cut short.

As per the official data from Germany' statistics office, it was revealed that consumer price inflation across the nation has risen 1.9 percent year-on-year; the uppermost level since July 2013.

The European Central Bank (ECB) has a core directive to target inflation at or around 2 percent and any intimation of rising prices could burden the central bank to end its easy monetary policy anytime sooner.

Head of Sovereign Risk at IHS Markit, Jan Randolph, said in an email on Monday that several investors have taken rising German inflation as an excuse to swing out of bonds into equity.

On the other hand, the French government bond yields also jumped sharply on Monday morning to touch 16-month highs.

The OAT (Obligations Assimilables du Trésor) sell-off was accelerated by news that a prominent left candidate for the French presidential election, had been selected as the Socialist nominee.

Moreover, on the other side of the political scale, Conservative leader Francois Fillon is struggling to reclaim momentum after a scandal linking payments to his wife.

Randolph claimed that the market is now pricing a thinner chance of an established political party seizing power in France.

According to the analyst, the appointment of radical-left winger Benoit Hamon yesterday, along with the possible scandal associated with Francis Fillon's wife as paid-secretary, would make the chances for the establishment parties weaker and the presidential race much more open than before.

He also warned that victory for far-right candidate Marine Le Pen will put pressure on French bond's which could force the ECB to consider new action.