London (CNN Business) — Desperate to save their economies from complete collapse, governments
borrowed unprecedented amounts of money on the cheap to support workers and businesses during the pandemic. Now, with
recovery in sight, a big risk looms: interest payments.
Spurred on by rock-bottom rates, governments issued $16.3 trillion in debt in 2020, and they're expected to borrow another $12.6 trillion this year, according to S&P Global Ratings. But fears are growing that an explosive economic comeback
starting this summer could generate inflation, potentially forcing central banks to raise rates sooner than expected.
Should that happen, the cost of servicing mountains of sovereign debt will jump, eating up government funds that could otherwise be spent on essential services or rebuilding weakened economies. US lawmakers approved a mammoth
$1.9 trillion stimulus package on Wednesday that could send prices higher and increase pressure on the Federal Reserve. Many economists think the threat of inflation may be overplayed. But political leaders, worried they'll need to make difficult tradeoffs in the years ahead, are watching the situation closely.
"Borrowing costs are affordable right now, but interest rates and inflation may not stay low forever," UK finance minister Rishi Sunak warned
when announcing the British government's budget earlier this month.
Waiting for inflation
Concerns about rising interest rates have come into focus as investors
offload government bonds. The yield on the benchmark 10-year US Treasury recently rose above 1.6% to its highest level in more than a year. Meanwhile, the yield on 10-year UK bonds spiked above 0.8% late last month, a steep rise from less than 0.2% at the start of the year.The moves have been triggered in part by growing confidence about the next phase of the pandemic. As vaccination campaigns allow governments to lift some restrictions, consumers are expected to rush to restaurants and hop on planes. That could push up prices, which central banks have pledged to keep under control.
Policymakers have played down the threat. Federal Reserve Chair Jerome Powell, speaking last week, said he
expects inflation to rise as the economy reopens, but stressed that the Fed will try to differentiate between a "one-time surge in prices and ongoing inflation," indicating he's in no rush to change course.
European Central Bank President Christine Lagarde is expected to send a similar message later Thursday when she speaks to reporters. Still, S&P Global Ratings pointed to inflation as a potential concern in a report on sovereign debt this month, noting it "could push central banks to increase interest rates, partially reversing the benefits of low debt-servicing costs."
"A big jump in interest rates would be very costly," said Ugo Panizza, professor of international economics at the Graduate Institute in Geneva. "Central banks will face very, very complicated tradeoffs if inflation does go up."
https://www.cnn.com/2021/03/11/investing...index.html