Nervous technocrats in Rome will be keeping their fingers crossed that the ECB may not have to raise interest rates too much
Save time by listening to our audio articles as you multitaskJust now nerves in Rome are a little jangled. Annual inflation across the euro zone rose to 7.5% in April.officials have been warming up markets for a possible interest-rate rise as soon as July. That would first require an end to the central bank’s main bond-buying programme. The yield on ten-year German bunds has surged in anticipation.
Italy has long been the weakest big link in the euro-zone chain. It has emerged from the pandemic with government debt of 151% of, the highest of any large economy bar Japan . In the right conditions, such debts are manageable. Indeed, if Italy’s nominalgrowth rate can stay ahead of the interest rate it pays, the debt burden would fall—as it did last year, when the economy bounced back from recession.
If sustained, higher yields will over time raise the cost to Italy of servicing its debts. Borrowing costs of 3% are not ideal. But Italy has locked in low interest rates on the stock of its existing debt, which has an average maturity of seven years. Over the longer haul Italy should be able to manage nominalplus 2% inflation, say.
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