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Update: Investors push ECB rate hike bets to October 2019 amid Italian turmoil

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Update: Investors push ECB rate hike bets to October 2019 amid Italian turmoil

A European Central Bank policymaker said interest rates could be raised in the middle of next year, but eurozone investors pushed rate hike expectations to October 2019 from June 2019 as the political crisis in Italy intensified and the euro area's growth slowed down.

"Interest rates are still historically low and will remain so for some months to come. A first hike around the middle of 2019 is not entirely out of the ballpark," ECB executive board member Sabine Lautenschläger said in a speech at a colloquium hosted by the Center for Financial Studies in Frankfurt.

Lautenschläger also said the ECB might decide in June to gradually end its €2.55 trillion bond-buying program by the end of 2018. But even when asset purchases are ended, monetary policy will remain "extraordinarily accommodative," the policymaker said.

Eurozone money markets, until recently fully priced in a rate rise at the ECB's June 2019 meeting, now see only a 30% chance of a 10-basis-point increase in June, Reuters reported.

The difference between the overnight interbank interest rate for the euro area, or Eonia, and forward Eonia rates dated for the ECB's policy meeting in June 2019 stood at 3 basis points, Reuters reported. That is half of last week's 6 basis points and a third of 9 basis points earlier in May.

The revised difference indicates about a 30% chance of a 10-basis-point hike in the ECB's minus 0.4% deposit rate, according to Reuters.

Earlier in May, markets had priced in almost three rate hikes of 10 basis points each for 2019, assuming the ECB would end its bond-buying scheme by the end of 2018, Reuters reported. However, mounting concerns over Italy's deepening political turmoil along with weaker economic data altered market expectations.

A 10-basis-point hike is now only fully priced in for the October 2019 meeting.

In Italy, bond markets plunged May 29 as President Sergio Mattarella turned to former International Monetary Fund official Carlo Cottarelli to form a temporary government after attempts by populist parties to establish a coalition collapsed over the weekend.

The move fueled concerns that fresh elections could boost support for eurosceptics and ignite a confrontation with the eurozone, as a Cottarelli-led government was seen as unlikely to receive parliamentary backing.

The two-year yield on Italian government bonds soared 147 basis points to 2.415%, while the 10-year yield surged over 37 basis points to 3.045% as of 7:07 a.m. ET. Bond yields rise as prices fall.

Meanwhile, eurozone economic growth slowed to 2.5% in the first quarter of 2018 from 2.8% in the last quarter of 2017.

The euro was down 0.58% as of 12:19 p.m. ET, and the Italian benchmark stock market index, FTSE MIB, closed 2.65% lower. The CBOE Volatility Index, which measures market anxiety, was up 24% in midday U.S. trading.

The ECB's Lautenschläger said policymakers remain confident in the strength of the eurozone economy. "We are seeing that the pace of growth has become more moderate, but we are not seeing a turning point."