The European Central Bank must be prepared to take the heat and raise interest rates further, including by more than the market expects, if that is needed to bring down inflation, ECB policymaker Isabel Schnabel said in an interview published on Saturday.

The ECB raised rates for a fourth straight time last week and hinted at further hikes - jolting eurozone bond markets and triggering a backlash from the Italian government.

Investors now expect the rate that the ECB pays on bank deposits, currently at 2 per cent, to rise to 3.4 per cent next year, compared to a 2.75 per cent peak priced in before last week’s decision.

Schnabel, the leading voice in the ECB’s hawkish camp that has driven the recent string of hikes, opened the door to increasing the deposit rate even further than the market expects if the inflation outlook requires it.

“Whether we will still need to go higher than that will depend on the future inflation outlook,” she told German newspaper Frankfurter Allgemeine Zeitung.

She added that the ECB will focus on medium-term inflation expectations, rather than current readings, and saw little risk of raising borrowing costs too far at present given that real interest rates are still very low.

Three top Italian ministers have criticised the ECB’s latest decision, which caused borrowing costs for debt-laden Italy to soar.

Schnabel said the ECB should weather the pressure.

“We can expect increasing pushback and we need to withstand it,” she said in the interview. “That’s exactly why central banks are independent.”

Meanwhile the eurozone bond yields were on track to post another weekly jump on Friday as the European Central Bank pledged further rate hikes and after robust labour data from the United States.

Investors expect bond prices to remain rangebound from now to the year-end after their recent fall, but they are aware that markets remain data-dependent.

US data pointed on Thursday to a still tight labour market, triggering a bond selloff on both sides of the Atlantic.

Germany’s 10-year government bond yield rose 2 basis points (bps) to 2.38 per cent on Friday and was about to close the week up 22 bps, after jumping by 24 bps the week before.

However, the discovery process of the central banks’ future monetary tightening path will be back in January 2023.

“It’s quite clear that financial markets and the ECB haven’t been on the same page recently,” said Massimiliano Maxia, senior fixed income specialist at Allianz Global Investors, mentioning the strong reaction to the ECB.

“Markets have been more focused on weak economic data and the risks that monetary policy would hurt the economy than just on inflation”, he added.

Two year yields, most sensitive to policy rates, hit a fresh 14-year high at 2.61 per cent, up 3.5 bps.

Germany’s yield curve flattened, with the gap between 2-year and 10-year yields at -22 bps. It hit its deepest inversion since 1992 last Friday at -41.9 bps.

Italy’s 10-year government bond yield rose 3 bps to 4.50 per cent, after hitting its highest since November 8 at 4.53 per cent. It was set to jump by 23 bps this week after rising by 46 bps to 210 bps in the last few days of the previous week.

Heavily indebted countries benefitted most from low rates, and their risk premium jumped after the ECB’s hawkish surprise.

The closely watched spread between Italian and German 10-year yields widened by 25 bps the two days after the ECB meeting but was about to tighten by 2 bps this week.

Spain’s and Portugal’s yield spreads rose 8 bps to around 110 and 102, respectively, last week and were set to fall 2 bps this week.

Investors said more enticing yields recently and a European Central Bank backstop could rein in the risk premium for Southern European debt, but next year will provide a real test.

Yields on Britain’s 10-year gilts were on track to jump 30 bps this week, setting their biggest rise since September, when former prime minister Liz Truss’ mini-budget proposals triggered a financial storm in UK government bonds.

Analysts flagged that market liquidity and depth was at very low levels.

Eurozone bond yields headed for their third straight week of increases on Thursday, extending the upward march kicked off by last week’s European Central Bank (ECB) meeting.

Adding to the upward impetus in yields, which move inversely to prices, was a sell-off in US Treasuries after data showed the world’s largest economy grew at a faster clip than initially thought in the third quarter, raising the chances of more sustained interest rate rises from the Federal Reserve.