Italy’s 10-year BTP yield rose above 4.55%, its highest level since October 2023, as tensions in the Strait of Hormuz pushed oil prices higher and stoked fears of renewed inflationary pressures and a prolonged period of elevated interest rates. Money markets now discount roughly 100 basis points of additional ECB rate hikes by late 2027, with eurozone inflation projected to climb to its highest level in three years.
In Italy, the government’s budget deficit for 2025 was confirmed at 3.1% of GDP, down from 3.4% in the previous year but still above the EU’s 3% threshold and at odds with the government’s earlier forecast of a reduction to 2.9%. Since March, the authorities have cut fuel taxes to bolster household consumption, although a temporary diesel tax reduction is scheduled to expire next month. Even so, voluntary price cuts by energy majors operating in Italy are offering some relief, partly offsetting the impact of constrained fiscal space ahead of next year’s general election.
