European Central Bank policymakers have delivered stiff warnings on inflation, convincing investors that interest rates will rise at least twice again as inflation threatens to test the ECB's tolerance.
Governing Council member Axel Weber said in a newspaper interview published on Tuesday that eurozone economic growth is robust and the ECB is ready to apply the monetary brakes through higher interest rates if necessary to control inflation.
His comments, combined with German data suggesting eurozone inflation is hovering close to the ECB's 2 percent ceiling, persuaded bond markets that rates are very likely to reach 4.25 percent or higher later this year.
"What is pretty clear at the moment is that we are in a stronger than previously expected recovery," Weber told the Financial Times daily newspaper. "If necessary, we also have to move into a territory that is portrayed as restrictive, if that is needed to control to control inflation."
The ECB is widely expected to raise its benchmark rate a quarter percentage point to 4.0 percent next week. But most analysts say rates would have to head even higher for ECB policy to rein in growth and restrict inflation. This prospect helped European government bond yields to scale multi-year highs on Tuesday, with the interest rate-sensitive two-year note hitting a fresh five-year peak of 4.372 percent before easing a little.
German data on Tuesday confirmed a picture of consumer inflation nudging up against the ECB's 2 percent ceiling this month. The German state of Baden-Wuerttemberg reported inflation rose to 2.2 percent year-on-year in May from 2.1 percent last month, while Bavarian inflation was steady at 2.1 percent, although the month-on-month rate eased.
This followed figures from four other German states which last week gave the first indication of trends in the wider eurozone. These showed inflation hovering at 1.9 percent in May, in line with analysts' expectations that the eurozone's Harmonised Consumer Price Index on Thursday will be at the same level.
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