MNI INTERVIEW: Germany Can Handle Higher Yields - Scope

Germany is well positioned to deal with higher debt interest costs, despite yields reaching 17-year highs, a senior analyst at Scope Ratings told MNI.

"The 10-year Bund is currently around the 3.5% level. But when we look at the yields, there is no specific level that would automatically become problematic for Germany," Carlo Capuano, Scope's Deputy Head of Sovereign & Public Sector said in an interview. 

"What matters is how higher yields affect debt sustainability over time. In particular, how quickly they feed into the average cost of debt, and whether the cost of debt is higher than nominal GDP growth," he said. 

“It's important to monitor the evolution of interest costs, but I would say Germany starts from a very favourable position."

INTEREST EXPENDITURE RISE

Scope reaffirmed Germany’s AAA rating with a stable outlook on Sept 4, pointing to “its wealthy, large and diversified economy, its robust fiscal policy framework and strong track record of fiscal discipline, and a competitive external sector.”

In the update, it said that the country’s net interest expenditures should increase from 0.9% of GDP in 2025 to 1.6% in 2031. This calculation was based on lower yields than current market levels, Capuano said. While he declined to give their precise level, he said the project interest cost "remains a moderate level, and I think this also reflects the fact that Germany benefits from a long debt maturity profile, high liquid bond market and exceptionally strong financing flexibility." (See MNI INTERVIEW: AfD Success Puts Spotlight On Retirement Reform)

"All these factors together help to moderate the impact of higher interest rates. So for sure, we are going to monitor the evolution of interest costs. But I would say Germany starts from a favourable position, and 1.6% by 2031 is still a moderate level," he added. 

Germany's debt-to-GDP is seen rising to nearly 66% this year and 70% in 2030, fuelled by surges in defence and infrastructure public spending first announced in March 2025.

"We have to think that we start from a debt-to-GDP ratio that is close to what it was in 2008, but again, there is no specific level that would automatically trigger a negative action or a negative outlook," Capuano said. 

"When we carry out our assessment, we focus on whether there is a credible strategy to stabilise public debt over the medium term, whether high borrowing is temporary or persistent, and – the key factor – whether this additional debt is used in a way to support stronger economic growth," he said. 

FUTURE RATING

Capuano noted that Germany has successfully navigated a series of major economic and geopolitical shocks whilst maintaining its AAA rating. (See MNI INTERVIEW: Germany To Lose 30% Industry Jobs In 10 Years)

“If Germany retains the ability to adapt to structural changes, implement structural reforms and translate higher public investment into stronger growth, we could expect that its core strength remains intact and the AAA rating is maintained,” Capuano added. 

MNI POLICY: RBA Assessing Upside Price Risk From El Niño

The Reserve Bank of Australia in late August held informal discussions with industry groups to detail risks on climate, particularly this season’s forecasted El Niño, which it believes could add further upward pressure to inflation, MNI understands. 

While Governor Michele Bullock failed to mention climate or El Niño risks following the Board’s August decision, and despite the topic also not formally featuring in the latest Statement on Monetary Policy (SMP), the issues were a prominent theme at the roundtables, with staff factoring the potential impacts into judgements on soft commodities. (See MNI RBA WATCH: Board Ready To Hike Further - Bullock)

The Bank is aware of the risks presented by El Niño and is monitoring the weather pattern as part of its ongoing assessment of economic conditions and the outlook.

Deputy Governor Andrew Hauser in mid-August pointed to climate risks during an industry forum. While he also failed to mention El Niño, he made clear the bank actively assesses supply shocks stemming from climate risk and its impact on the economic outlook. 

The RBA is likely waiting to fully gauge the severity of the El Niño before commenting publicly. The Bank warned in its November 2023 SMP that the then-forecast El Niño could push up food prices over the following year. The event ultimately proved relatively mild, while concerns about drought contributed to some farmers aggressively destocking livestock ahead of the expected dry conditions. 

MNI PBOC WATCH: Sept LPR To Hold As Fiscal Efforts Prioritised

China’s Loan Prime Rate is likely to hold steady in September as authorities emphasise fiscal expansion amid soft bank loan demand, and continue to more closely coordinate fiscal and monetary policy.

The one-year LPR is expected to hold at 3.0% and the five-year tenor at 3.5% on Sunday for the 16th consecutive month. Both rates were last lowered by 10 basis points in May 2025 after the People’s Bank of China cut the seven-day reverse repo rate and reserve requirement ratio.

Liu Shangxi, vice president of the China Society of Macroeconomics, told MNI fiscal and monetary policy coordination is needed to improve policy transmission efficiency, particularly amid strong supply and weak demand. Interest subsidies and financing guarantees can ease constraints on corporate borrowing caused by debt pressures and weak profitability, he said, noting bank lending becomes more difficult as debt accumulates and real interest rates remain elevated. (See MNI: China To Deepen Fiscal-Monetary Coordination, Eye Credit)

The Ministry of Finance and PBOC recently announced plans to optimise the existing CNY100 billion fiscal-financial coordination fund, expanding the scope of interest subsidies to include working-capital loans to small and medium-sized enterprises and credit-card use. Authorities also raised the ceiling for SME loan interest subsidies.

POLICY COORDINATION

Yuan Haixia, director of the Research Institute at China Chengxin International Credit Rating, said fiscal-financial coordination is likely to focus on three main instruments, including interest subsidies to lower short-term financing costs, guarantees and risk compensation to support technology innovation and SMEs facing high risk premiums, and government investment funds, policy-based finance and REITs to provide long-term capital to sectors driving new productive growth.

If policy impacts fall short, authorities could expand the scope of interest subsidies, raise quotas or extend subsidy durations, she said. Authorities could also expand guarantee programmes for private investment and risk-sharing schemes for private corporate bonds. (See MNI INTERVIEW 2: China's Econ Restructure Needs More Support)

Advisors noted fiscal authorities will expand support by providing guarantees and interest subsidies for corporate bond issuance of technology companies and enterprises involved in the "six networks," including electricity, computing infrastructure and railways. Since 2025, fiscal authorities and the PBOC have jointly subsidised technology-innovation bond issuance to lower financing costs for high-tech firms.

WEAK CREDIT

PBOC Governor Pan Gongsheng revealed in an article published in Qiushi Journal on Wednesday the end to China's rapid monetary expansion, adding slower bank loan growth will become the new normal as the economy shifts its focus to high-quality growth represented by high-tech companies.

Warning of the fast rise in the leverage ratio over the past few years, he downplayed the role of loan expansion as a key indicator to assess policy effectiveness.

Pan’s comments followed August data that showed unexpected weakness in bank loan growth, with household loans contracting for a second consecutive month and corporate loan growth at its lowest level since 2016.

Meanwhile, from January to August, the combined new issuance of corporate bonds, non-financial corporate equities, and government bonds accounted for 50.3% of new total social financing, exceeding the share of loans for the first time.

RPT-MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

(Repeats story first published on Sept 16)

Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.

MNI FED WATCH: Fed Leans Toward Another Rate Hike This Year

Federal Reserve officials look inclined to raise interest rates once more this year and potentially another time early next year, according to new dot plot projections that suggest Wednesday's interest rate hike was the start of a limited tightening cycle. 

Fed Chairman Kevin Warsh declined to discuss whether the increase in the federal funds rate to 3.75%-4% was the first of a series of moves, in keeping with his desire to offer less guidance. But he said underlying inflation is too high and the geopolitical situation has changed, hinting conditions are not yet tight enough to bring inflation back to target in a timely manner.

The SEP clearly showed policymakers hawkishly leaning into a higher for longer posture, with the median showing one more hike for 2026 and eight officials penciling in another rise in 2027. For a second time in a row, Warsh did not submit dots for the SEP. 

"The plain fact is that inflation is too high and has been for too long,” Warsh said during the news conference. "Inflation risks are to the upside, while labor risks are roughly balanced."

He said the FOMC's standard of having confidence that underlying inflation is moving back to target in timely manner has not been met, adding too many categories in the inflation basket are still rising above 3%.

"We removed a dose of accommodation so that financial and credit conditions would be more consistent with our ultimate objectives," he said.  

Equities sank and Treasury yields jumped after the central bank meeting. Futures see a 50% chance the Fed increases rates at its next meeting in October. (See: MNI INTERVIEW: Fed Rates Likely To Peak 75BP Higher-Lewis)

HIGHER FOR LONGER

Warsh demurred from any questions related to President Donald Trump, who has made clear his desire for lower rates. Just days before the meeting, Trump threatened to cut off broad swathes of trade if the Fed did not cut rates. Trump demanded lower interest rates to 1% after the FOMC meeting.

The Fed Chairman said three factors influenced the FOMC's decision to raise interest rates on Wednesday. One, wide-ranging data suggesting a strong economy. Second, summer inflation trends that "weren't passing the test." Lastly, the FOMC assessment that the geopolitical situation has changed. 

"All three of those things helped themselves to a firm, unanimous decision today," Warsh said. (See: MNI INTERVIEW: Fed Rates Likely To Peak 75 BP Higher - Lewis) 

The median FOMC official saw rates coming down in 2028 to 3.9% and in 2029 to 3.6%. Inflation isn't expected to reach the central bank's 2% target until 2029. 

"Today's action starts to show we are serious about this. And we will deliver on the price stability objective, and as the statement said, we will do it on a timelier basis," he said. 

Long-end Treasury yields have risen recently for three reasons including economic strength, competition for capital, and geopolitics, Warsh said, in a shorter press conference lasting less than 30 minutes. 

RPT-MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

(Repeats story to add title)

Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.

MNI INTERVIEW: Overblown Rate Path Tricky For BOE - Aikman

Members of the Bank of England’s Monetary Policy Committee are likely to regard the markets rate path projecting slightly less than 100 basis points of hikes by the middle of next year as overblown, but its effect in tightening financial conditions is also useful, complicating officials’ communications challenge, National Institute of Economic and Social Research head David Aikman told MNI.

Most members probably judge that domestic inflationary forces continue to be subdued, with weakness in the labour market, a situation which does not call for steep tightening, Aikman, also a former senior BOE official, said in an interview ahead of Thursday’s rate decision, at which the BOE is widely expected to see Bank Rate left at 3.75%.

While officials may not necessarily address market pricing this week, they would be wary of rapidly deflating rates expectations which are exercising a disinflationary effect at a time when energy prices have been pushed higher by the conflict in the Middle East, he noted.

"There's a degree to which this is quite convenient for the MPC because ... they've effectively tightened policy really quite a lot relative to the outlook back in February (when the Iran war started)," he said. (See MNI INTERVIEW: More Difficult For BOE To Look Through-Sentance)

At that point Bank Rate was expected to come down, but the curve has since steepened by around 200 basis points, Aikman noted.

“They've done a lot of tightening without really doing anything," he said.

Aikman stressed however that that fear of further reinforcing tightening expectations would be unlikely in itself to prevent the MPC from delivering a surprise hike in September should it see fit to do so. (See MNI: BOE Needs Simple Line As Market Diverges - Forbes)

"There's still language they can use explaining the decision" and suggest whether they are comfortable with the curve so "I don't think it is a constraint on their ability to act this time," Aikman said.

Rates markets are pricing in a hike at the BOE's November meeting. NIESR's summer forecast anticipated that the BOE would remain on hold in 2026, and their next forecast update is due in the autumn.

PUZZLING DIFFERENCE

While the rate path shows Bank Rate heading up fairly swiftly from its current 3.75% towards 5% analysts have very largely assumed a lower path. Aikman does not buy the argument that the differences are purely technical.

"I don't think term premium could explain a gap of that size at that horizon. I think it is an actual puzzle as to exactly what's going on here, and whether it is just a difference of view between the way economists are reading the runes and trying to understand the likely reaction of MPC members, and actually where market participants think ultimately the forces will take the MPC," he said.

"Do they actually think they're going to raise rates all the way up to five to contain a shock that isn't being amplified, at least so far .. through second-round effects, wage setting, and so on?" he said.

"I think that's … a difficult judgement for them. It's a levels question about … what's the point where this tightening gets excessive," he said, adding that they probably think the level has "gone a little bit too far."

Aikman is clear that is up to individual MPC members to take a view on the appropriateness of the curve and that it is not a technical judgement for Bank staff.

As an MPC member "you should have a view on whether the curve .. is providing the right degree of support or tightening required to meet the target you've been given," he said.