Europe Markets

Germany’s benchmark borrowing costs moved near to their highest in more than 12 years early Tuesday after a European Central Bank official stressed interest rates would remain at record levels for an extended period in order to damp inflation.

Francois Villeroy de Galhau, ECB member and Governor of the Bank of France, said in an interview with BFM TV, a French news channel: “Inflation is a disease and rates are the medicine. The medicine is starting to work…. We think 4% is a good level. We need to maintain the rates at 4% a sufficiently long time.”

The ECB last week raised its deposit rate by 25 basis points to 4%, its highest ever level as it seeks to bring inflation back down to its 2% target. Data released Tuesday by Eurostat said inflation in the eurozone was 0.5% month-on-month in August and 5.2% year-on-year.

Ten-year German bund yields BX:TMBMKDE-10Y, the continent’s longer-term benchmark, early in the session rose above 2.72%, just a few basis points shy of their highest since July 2011. They later eased back to trade at 2.705%, off less than 1 basis point on the day.

U.K. 10-year yields BX:TMBMKGB-10Y fell 5.4 basis points to 4.338% after Citigroup joined Goldman Sachs in predicting that the Bank of England’s likely 25 basis point rate hike to 5.5% on Thursday will be its last in this cycle. Further downward pressure on gilt yields came from the OECD, which predicted the British economy will grow 0.8% this year, down from its 1% forecast delivered in June.

Currency moves were minimal, however, as a reluctance to make bold bets relative to the dollar ahead of the Federal Reserve’s policy decision on Wednesday, left the pound GBPUSD, +0.51% hovering around $1.24 and the euro EURUSD, +0.38% near $1.07.

Meanwhile, Europe’s bourses were mostly mildly firmer as they pared some of the losses seen at the start of the week. The DAX DX:DAX in Frankfurt was flat, while the CAC 40 FR:PX1 in Paris rose 0.3% and London’s FTSE 100 UK:UKX added 0.2%, supported by strength in oil majors as the price of crude BRN00, +0.41% flirted with 10-month highs.

A notable poor performer was London-listed Kingfisher KGF, -0.51%. Shares in the home improvement retailer dropped more than 7% after it warned of tough markets in Poland and France and cut its profit forecasts.

“As interest rates reach record levels in the eurozone pushing up borrowing costs, shoppers appear to be tightening their belts further, leading the company to downgrade its annual profit forecast by 7%,” noted Susannah Streeter,” head of money and markets at Hargreaves Lansdown.

Russ Mould, investment director at AJ Bell, said it was ‘gloomy Tuesday’ for the U.K.’s mid and small-cap sector as a flurry of profit warnings suggested economic conditions were deteriorating.

“Fashion retailer Quiz QUIZ, -1.41% has been having a terrible time, with management blaming inflation for dampening consumer confidence and demand for its products, prompting a near-40% sell-off in its shares. Northcoders CODE, , a specialist in training for software coding, saw its share price crash 38% after implying that clients are much more reluctant to commit to training due to budget constraints, job cuts and recruitment freezes,” said Mould,

“Even alcohol seller Naked Wines WINE, -8.89% couldn’t escape the doom and gloom, saying that its new financial year had started off slower than expected, causing its shares to crash 10%. These profit warnings suggest investors need to be on their guard for the next earnings season,” he added.