German Bund yields continued to rise this week, with the 10-year yield hitting a 29-month high. Higher yields are unlikely to have much of a direct effect on the German economy, but by boosting the euro they may have significant indirect effects. Indeed, rises in bond yields and the euro imply that monetary conditions in the euro-zone as a whole have tightened significantly over the past six months.
This will make it harder for the ECB to get inflation back up to its target. While reports this week suggested that the ECB might soon provide clearer guidance on the outlook for short-term policy rates, this will not necessarily be enough to keep the longer end of the yield curve down or prevent further rises in the euro. To keep longer-term yields contained, the Bank might have to get more creative.
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