The rise in inflation will last longer than expected. For now, until 2028. And while waiting for the 25 basis point increase in interest rates announced yesterday by the European Central Bank (ECB) to come into force on September 16, this inflation forecast has had an immediate effect.
The public debt market, already turbulent due to the worrying prospects that leave an uncertain international outlook and a fuel price that continues to increase, reacted on the same day that the ECB spoke: in Spain, the ten-year bond yield climbed to 3.963%, maximums not seen since 2023. For its part, Germany's ten-year bond (the European benchmark) stood at 3.5%, back at 2011 rates. France's ten-year bond has also returned to levels not seen since the 2008 financial crisis, closing yesterday at 4.431%.
In a scenario in which inflation rises, and interest rates also rise (as the ECB did yesterday but the Fed could also do before the end of the year), it poses a great challenge for economic growth at all levels: the consumption of families and companies is constrained, but also the financing of public administrations, whose room for fiscal policy maneuver is narrowed due to the increase in financial costs and the reluctance of the markets to finance their volume of public debt, explains the latest analysis by the Funcas think tank.
The rally in bond yields is not just due to higher inflation or tightening monetary policy. "The feeling of inability of governments to contain the deterioration of budgetary imbalances and prevent an unsustainable accumulation of debt also contributes," explains Funcas. Increases in public spending on defense, state aid to cushion the effect of the geopolitical situation, social (and less volatile) measures such as the cost of population aging... At the end of all this is the (visible) difficulty in generating sufficient income and financing that expenditure, and "all of this results in the sharp increase in the financial costs that States will have to assume in the coming years," concludes Funcas.
But the reaction of the public debt market is not limited to Europe and its central banks: it is an effect on both sides of the Atlantic, and increasingly conditioned by the Middle East crisis. In fact, worldwide, government bonds have skyrocketed their profitability to levels of 3.72%, not seen since the 2008 financial crisis, according to data from the Bloomberg Global Government Bond Index. And just yesterday the Financial Times reported how the yield on the 30-year US bond stood at 5.35%, its highest level since the economic crisis of 2007, and which analysts attribute to a double blow: the increase in credibility risks, but especially the constant rise in oil prices. A situation that Donald Trump intends to extend until after the midterm elections, which will be held in November, as he declared yesterday. In the case of economies like Japan, the yield has gone from almost zero values to yesterday approaching 3% again, a level not seen since the 1990s.
"The main risk is that persistent pressures on energy and food will boost inflation expectations and increase the risk premiums demanded by investors," explains Generali Investments, before adding: "Debt burdens continue to rise and interest expense is becoming an increasingly important budget item" for countries.
In between, the decision of the Governing Council of the ECB came yesterday to raise interest rates until leaving the deposit rate at 2.5%, that of refinancing operations at 2.65% and that of the marginal lending facility at 2.90%. The ECB's verdict was clear: "The conflict in the Middle East continues to generate inflationary pressures and inflation is expected to remain well above target for a prolonged period." In this way and with respect to the last meeting in July, they maintained inflation forecasts at 3% for 2026, and raised them to 2.5% in 2027 and 2.1% in 2028. In the case of core inflation (excluding energy and food), they placed it at 2.5% in 2026, 2.6% in 2027 and 2.3% in 2028.
So the ECB toughens its policies in the face of a second half of 2026 that will not be easy for the Old Continent. "The outlook remains subject to high uncertainty, with upward risks for inflation and downward risks for economic growth," explained the organization chaired by Christine Lagarde after carrying out the second rate increase in 2026, a measure that it had not resorted to since 2023 and that opens the door to a cycle of pressure on consumers' pockets after years in which cuts or stagnation have been the norm. But, above all, it is a preventive response from the ECB as long as there is no definitive solution for the reopening of Hormuz and the rise in inflation is controlled, which also entails its own risk: that of economic activity deteriorating in the face of more restrictive financial conditions, already mired in an energy price shock and an unstable outlook.
Because in the meantime, another pressure is growing, that of all prices, and whose origin is in the increase in the cost of raw materials. Yesterday the price of West Texas Intermediate (WTI) oil, a reference in the US, surpassed the $100 barrier after an increase of 5.7% during the day. In the Old Continent, the price of Brent oil shot up 5.5% and exceeded $107 per barrel during the day (levels not seen since May) while natural gas reached prices not seen since December 2022, the year in which its cost skyrocketed after the Russian invasion of Ukraine and started an energy crisis that still lasts: it was quoted at 81.70 euros per megawatt per hour at the closing of the markets due to a 3% intraday rally.
The origin of the swing is once again in the tensions in the Middle East, and how the Hormuz blockade continues to put upward pressure on fuel prices. In addition, concern is increasing about the reserves with which countries will face the next winter, and uncertainty is fueled by new attacks on oil companies or the news that Saudi Arabia (one of the members of the Organization of Petroleum Exporting Countries, OPEC) has produced 6.2 million barrels per day in August, the lowest monthly figure in 2026 and 23% lower than that of July, a fact that is added to the pronounced decrease in pumping in Iran (-16 %), but that the alliance of countries compensates with the production of Iraq.
The case of Spain and the rise in inflation
In this context of greater indebtedness, and "in the absence of new budgets that allow priorities to be adapted to the great challenges, the interest bill will increase by almost 50% until 2030, exceeding 60,000 million euros that year," says Funcas in the case of Spain.
"If rates remain at the same levels as in 2025 (that is, around 3.2% for long-term rates and 2.2% for short-term rates), interest payments would be around 57 billion euros in 2030, that is, 17 billion more than in 2025," the think tank continues. And if the 0.5% interest rate increase that the ECB has already carried out in 2026 is taken into account, the bill increases by another 3.6 billion in 2030, reaching just over 60 billion.
