Rising oil prices may also impact investors’ bets, said Andrew Kenningham, chief European economist at Capital Economics.
“This could contribute to the view that inflation will not come down very quickly,” Kenningham said.
He added: “There has definitely been a change in the prevailing narrative. Investors expect central bank interest rates to remain high for a longer period.
Messages issued by the US Federal Reserve last week stressed continuing on this path.
“People are starting to realize that the ECB as well as the Fed will keep interest rates higher for longer,” said Althea Spinuzzi, chief fixed income strategist at Saxo Bank.
The consensus among analysts is that the European Central Bank will not start cutting interest rates until next spring. Capital Economics’ forecast is for no rate cuts for 12 months.
“We think the ECB will be very reluctant to take its foot off the brake, because even if inflation falls very quickly, which I think it will, the labor market is very strong,” Kenningham said.
The economic outlook has become increasingly unstable. The spread between Italian and German government bond yields has risen to nearly 2 percentage points, the widest gap since March, when the US banking crisis rattled markets across Europe.
Spinuzzi warned that this could raise new problems for the ECB, because it means higher interest rates are hitting euro zone economies unevenly.
“It is one of the drawbacks of having a monetary union. It is also likely to be a problem for Italy in terms of the dynamics of its debt. If they have to pay more to borrow, they will need to grow their economy much faster or face larger deficits,” Kenningham said.