ECB to discuss 50bp rate hike this week

European Central Bank policymakers will discuss whether to raise interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation, two sources with direct knowledge of the discussion told Reuters.

The sources said policymakers were also homing in on a deal to provide help for indebted countries like Italy on the bond market - provided they stick to European Commission rules on reforms and budget discipline.

The sources, who spoke on condition of anonymity because the deliberations are private, added the discussion about whether to increase rates by 25 or 50 basis points was still wide open.

Other major central banks have been raising rates in bigger increments, such as 75 or even 100 basis points, to contain surging inflation, raising the pressure on the ECB to do more.

Policymakers were also homing in on a deal to provide help for indebted countries provided they stick to European Commission rules

But a looming recession in the euro zone made some governors more cautious about choking off growth.

An ECB spokesperson declined to comment, citing the bank's pre-meeting quiet period.

The euro jumped on Tuesday after Reuters first reported that a 50 bp hike was under discussion, and was last up 0.9 per cent against the dollar at $1.0232. The single currency briefly fell below parity last week.

Yields on euro zone government bonds also rose, with Germany's two-year benchmark now yielding 1.329 per cent.

The ECB said on June 9 after its last meeting that it would raise interest rates gradually, probably by 25 basis points in July with a bigger move possible in September.

But ECB chief Christine Lagarde later said there were "clearly conditions in which gradualism would not be appropriate".

Euro zone inflation hit 8.6 per cent last month and is expected to keep rising until the autumn, driven by soaring fuel and food prices.