French prime minister Francois Bayrou. Photo: AP
The governing council of the European Central Bank (ECB) meets on Thursday, with the expectation being that it will leave the main interest rate unchanged at 2pc, just as it did in July. This followed eight successive quarter-point cuts.
Inflation in the euro-zone edged up to 2.1pc in August, just very slightly above the ECB’s 2pc target. Furthermore, European economies are proving resilient following the imposition of a general 15pc tariff on their exports by US president Donald Trump.
While there is likely to be ‘no news’ from the ECB, the markets are certainly awaiting the outcome of today’s government no-confidence vote in France. The country is under severe pressure to fix its public finances, with the national debt standing at 113.9pc of GDP. Last year its deficit was almost double the 3pc limit set by the EU.
Francois Bayrou, the prime minister, is trying to pass a budget with €44bn in savings, including scrapping two public holidays. Amid outcry from the opposition, he called a confidence vote in his fiscal strategy – one he is likely to lose this evening. This will lead to his resignation.
Such political upheavals would usually lead to a jolt in the bond markets, but the interest rates on French debt is already sky-high. In addition, Mr Bayrou is so likely to lose that the markets have already priced this in. If the political impasse ends with elections, in which the far right would probably win more seats, you can expect the markets to respond pretty violently, however.
Unlike the French, the National Treasury Management Agency is having no difficulties navigating the bond markets. Its next auction – the third this year – is taking place on Thursday, with more details due to be announced today.
Ireland’s 10-year government bond yields were hovering around 3pc last week, which compares with the 3.5pc seen in France and as high as 4.7pc in the UK, whose 30-year gilt reached levels not seen since 1998.
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