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ECB rate expectations sting Greek and Italian government debtSigns of more aggressive stance on in

ECB president Christine Lagarde signalled a ‘hawkish’ shift last week by refusing to rule out a potential rate rise this year © Thomas Lohnes/Pool/EPA-EFE/Shutterstock

Borrowing costs for southern eurozone governments jumped close to pre-pandemic highs on Monday as investors adjusted to signs that the European Central Bank could raise interest rates as soon as this year in response to the global wave of inflation.

The ECB has trodden a careful line on the prospect of rate rises for several months, promising to keep financing conditions favourable until the eurozone economy has rebounded from the pandemic and it is convinced inflation will settle at its 2 per cent target over the medium term.

But president Christine Lagarde signalled a “hawkish” shift on Thursday by refusing to rule out a potential rate rise this year — as she had done only weeks earlier — and noting “unanimous concern” on the ECB’s governing council about record eurozone inflation of 5.1 per cent in January.

Over the weekend, Klaas Knot, the Dutch central bank head, became the first member of the ECB council to say publicly that it should raise interest rates this year, warning that eurozone inflation would stay at 4 per cent for most of this year. He called for the ECB to end net bond purchases “as soon as possible” in preparation for raising rates in the fourth quarter.

In response, a drop in eurozone bond prices sent the yield on Italian 10-year bonds up 0.1 percentage points to 1.84 per cent — back to levels reached in April 2020 shortly after the coronavirus pandemic hit.

The spread between Italian 10-year borrowing costs and those of Germany — a key measure of stress in eurozone bond markets —