The European Central Bank is expected to hike interest rates sharply after inflation hit a record high in August, leading to a fall in European bond markets.
Eurozone inflation rose to 9.1 per cent year on year in August, up from 8.9 per cent in July and above the 9 per cent forecast.
This means inflation, as is the case in other Western economies, is well ahead of the central bank's 2 per cent target, driven by soaring energy and food prices.
Fiona Cincotta, senior financial markets analyst at City Index, said Eurozone inflation could enter double digits as early as next month, meaning she expects a "big rate hike" from the ECB this year.
"No matter how you look at it, the outlook for the region is pretty bleak, with few signs that peak inflation is passing," she said. "Instead, the markets are bracing themselves for inflation to keep rising to double digits, possibly as soon as next month.
"With German [producer price index] at 37.2 per cent and energy prices soaring even before the colder weather arrives, any hope of inflation cooling appears to be misplaced.
"The data favours a big rate hike from the ECB as the hawkish calls from the central bank grow. Even if the ECB does hike by just 50 basis points, more rate hikes are likely across the remainder of the year as the ECB attempts to stop inflation from becoming entrenched."
Analysts at JPMorgan, Goldman Sachs and Bank of America have also said they expect the ECB to raise rates by 0.75 percentage points at its next meeting.
Cincotta said hawkishness from the ECB was already priced in. "The euro is struggling to push higher amid rising concerns about the Nord Stream gas flow cut-off for three days this week."
Europe’s bond market is on course for its worst month on record as investors priced in the expected rate hikes, according to the FT.
The Bloomberg Pan-European Aggregate Index, which tracks fixed-rate, investment-grade securities issued in European currencies, is down 6.18 per cent in the month to August 31.
The month saw the biggest drop since the index began in 1999, according to the FT, which said the decline has been broad, with UK, German and French debt all hit by heavy selling in a reversal of July’s gains.
Katie Binns, Morningstar Indexes fixed income lead, said the Morningstar Eurozone Treasury Bond Index had seen "its worst monthly performance of the year" amid the anticipated rate rises from the ECB.
“As inflation and recession concerns keep swirling, yields on the Morningstar Eurozone Treasury Bond Index have risen more than 75bps in the month of August.
"Week over week, yields jumped more than 20 bps to 2.1 per cent, nearly bringing the index back to the all-time highs seen in June and resulting in significant losses.
"In August, the Morningstar Eurozone Treasury Bond Index lost 5.2 per cent, its worst monthly performance of the year, bringing its YTD loss to more than 13 per cent."