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Euro Zone inflation expectations at highest

A key market gauge of euro zone inflation expectations rose to its highest level since mid-2015. This is further a sign that investor perceptions over the direction of future inflation are shifting. In the past, although relief over a slowdown in the pace of European Central Bank purchases appeared, then the Euro zone bond yields were broadly steady. And evidence that expectations for higher inflation, that are boosted by Germany’s election race and signs of supply bottlenecks in recent weeks, moved into the spotlight.

The ECB has tracked, five-year, five-year breakeven inflation forward. This is a long-term market inflation gauge. It has risen almost 15 bps since the start of September. Antoine Bouvet, senior rates strategist at ING said that the rise in breakevens and inflation is a reflection of much greater inflation risk than in recent years. He added that he doesn’t think the median long-term inflation expectation has shifted materially higher. But the range of possible outcomes is much wider than it was a couple of years ago. This is stated by citing factors such as supply chain disruptions for the increase in inflation protection.

The ECB’s Isabel Schnabel said that inflation will ease next year after the current spike but she listed risks to that scenario from supply bottlenecks to higher wages. Breakeven inflation in Germany, has also shot up, a sign for some analysts that investors expect policies under the next German government could stoke inflation. Olaf Scholz, the Social Democrat candidate, beat his conservative rival in a primetime TV debate. Most experts think a three-way coalition is the most likely outcome. But this could take several months to negotiate.

Rabobank senior rates strategist Lyn Graham-Taylor stated that there is uncertainty about the coalition outcome and that is affecting the term premium in German bonds. This is especially the inflation expectation component. There is a concern that the next government could have policies that are inflationary. Germany’s 10-year Bund yield was steady at around -0.33%. Bond issuance steps up, with ING estimating that supply could reach 30 billion euros. The European Union mandated banks to sell a new 7-year bond. This is according to a lead manager memo. And Greece said it may issue a green bond in the second half of 2022.

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Euro zone ministers expect inflation to slow in 2022

The acceleration of euro zone inflation, driven energy prices, is mostly temporary. Then the price growth will slow down again. The euro zone finance ministers agreed that, that too the next year as forecasted by the European Central Bank and the European Commission.

Paschal Donohoe, chaired the talks of the ministers in Luxembourg. In a news conference he said that there was also agreement that the inflation spike was not an argument against the transition to renewable sources of energy. This is under the EU’s ambitious plan of reducing CO2 emissions to zero by the year 2050.

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Under new rules, borrowing for investment sensible

British finance minister Rishi Sunak said that the government borrowing to fund investment was a sensible thing. This is to allow under new fiscal rules that he is likely to announce, unlike borrowing for day-to-day spending. He said that borrowing for capital investment that is going to drive up their growth is probably a sensible thing for them. And that too particularly in an environment of slightly lower interest rate. Sunak stated this in an event on the sidelines of the annual conference of Britain’s ruling Conservative Party. This event was organized by the Taxpayers’ Alliance advocacy group. Sunak stated in that event, that borrowing for more day-to-day spending is probably less something that you would want to have as part of your framework.

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IMF board to interview Georgieva-sources

The International Monetary Fund’s executive board is going to interview Managing Director Kristalina Georgieva. This is regarding that; its reviews claims that she pressured World Bank staff to alter data to favor China in her previous role. Board members were initially expected to meet with Georgieva. But spent their time working on other regular business matters.

The board members spent hours for questioning lawyers from the WilmerHale firm. This is about their World Bank investigation report which alleged that Georgieva, as the bank‘s CEO applied undue pressure on staff, to alter data in the flagship “Doing Business” report to benefit China. Then, an IMF spokesperson said that the IMF board remains committed to a thorough, objective, and timely review of the matter. Georgieva has strongly denied the accusations.

The upcoming interviews could prove pivotal in either increasing support for Georgieva. This is with many IMF shareholders are keen to wrap up the board’s deliberations on the matter. The fund’s most influential member governments, including the top shareholder the United States, have withheld public judgment. The World Bank tasked WilmerHale with investigating the “Doing Business” data irregularities identified in 2020. The law firm’s report contends Georgieva. The former World Bank President Jim Yong Kim’s office pressured staff to manipulate data so that the China’s global ranking in the “Doing Business 2018” study of investment climates rose to 78th from 85th.

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