Markets bet ECB will hike interest rates aggressively by 1% this year       

ECB president Christine Lagarde said a first interest-rate increase may follow “weeks” after net bond-buying ends early next quarter, joining a growing crowd of policy makers signaling a move as soon as July.

Traders have priced in a more aggressive pace of monetary policy tightening from the ECB after an official raised the prospect of larger rate hikes this year.

Governing Council member, Klaas Knot, said he supports a quarter-point increase in July and that a bigger move may be justified if data show inflation worsening. 

Money markets priced in 106 basis points, or 1.06%, of tightening by December after the comments, compared to 86 basis points at the end of last week.

The euro rallied by more than 1% against the dollar as traders recalibrated their expectations, the biggest increase since March 9 on a closing basis. 

Investors rushed to off-load short-term debt — the most sensitive to changes in monetary policy — narrowing the spread between two- and 10-year German bonds by four basis points.

Rate setters appear increasingly convinced of the need to tighten policy in the face of record inflation, which risks accelerating further amid a standoff with Russia over energy supplies. 

Earlier this month, ECB president Christine Lagarde said a first interest-rate increase may follow “weeks” after net bond-buying ends early next quarter, joining a growing crowd of policy makers signaling a move as soon as July.

“We haven’t hit peak inflation in Europe so we shouldn’t expect the ECB to tone down its rhetoric,” said Antoine Bouvet, a rates strategist at ING Bank.

Knot is going one step further leaving open the possibility of a bigger hike than 25bp in July if inflation broadens. 

Surging inflation the world over is pushing central banks to consider larger-than-conventional interest-rate hikes as they rush to scale back crisis-era stimulus. 

The US Federal Reserve hiked by a half-point in its latest decision for the first time in over two decades; some economists have already speculated the ECB could go down the same route.

Not everyone is convinced the ECB will manage to pull off an aggressive pace of tightening, especially given the headwinds to growth. 

Rather, some strategists say the latest hawkish shift could be an attempt to shore up the common currency. 

Last week, it touched a fresh five-year low against the dollar, putting parity against the dollar in sight for the first time since 2002.

There were further warnings about global price pressures as M&S chairman Archie Norman said food price inflation in Britain could hit 10% this year. 

"It wouldn't be surprising to see food price inflation over the course of the year running towards 8% to 10%," Mr Norman said.

But we don't know that yet because it runs through the year, some has gone through now but quite a lot's still to come.

British grocery inflation hit 5.9% in April, its highest level since December 2011, according to market researcher Kantar. 

In Ireland, CSO figures showed that annual consumer price inflation rose 7% in April, and food prices rose by 3.5%. 

Bank of England governor Andrew Bailey said rising food prices, which have been pushed up by the conflict in Ukraine, were a major worry, not just for Britain but for developing economies too.

• Bloomberg, Reuters, Irish Examiner