President of the campaign group Generation Frexit, Charles-Henri Gallois, described the ECB as being “stuck”, saying that “the slightest signal for a change in monetary policy to fight against inflation” will cause the borrowing rates of southern EU countries to “rise sharply”. He added: “The debt will become unsustainable and these countries will be forced out of the euro.” This comes as Christine Lagarde, President of the European Central Bank, refused to rule out raising interest rates this year.
This came in response to the bank’s “unanimous concern” about soaring prices.
She said that inflation risks were “tilted to the upside” after the consumer price index (CPI) measure of inflation rose by a record 5.1 percent across the eurozone in January.
In a marked change from earlier comments which saw Ms Lagarde play down the chances of interest rate rises in 2022, she said the ECB was “getting much closer” to hitting its inflation target.
This has sparked fears that borrowing costs will rise significantly throughout 2022.
In the fourth quarter of 2020, Greece had a national debt amounting to 205.6 percent of GDP, while Italy’s national debt was 155.8 percent of GDP.
Portugal had the third-highest debt of the bloc, at 133.6 percent of GDP, while Spain had a national debt of 120percent.
All of these figures are well above the EU’s debt threshold of 60 percent of GDP.
Ms Lagarde said there was a “consensus” among ECB policymakers to keep interest rates unchanged.
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The potential for rising interest rates come as a result of rapidly growing inflation globally, as economies reopen following the pandemic.
Ms Lagarde said there had been “unanimous concern around the governing council table about the impact of inflation” on European citizens, noting the “day-to-day hardship of having to put up with higher prices”.
But she said that the council would be “gradual in whatever we do” and “not be rushed into anything”.
After the ECB press conference, where the tightening of monetary policy was signalled, Italy’s 10-year bond yields – the rate of interest at which a national government can borrow – rose about 20 basis points to 1.66 percent, the highest level since May 2020.
James Athey, investment director at Abrdn, told the FT: “The ECB is opening up a potentially huge hole for Italian bonds to fall into.”