Traders are betting that the ECB will raise interest rates in two years' time, but based on market inflation expectations, that expectation is hardly tenable.

An indicator of the expected trajectory of CPI shows that inflation will struggle to meet the ECB's mandate targets for the next 30 years. This calls into question the market's current forecast that interest rates will rise by 10 basis points by the middle of 2023.

The bet reflects that consumer prices rose 2 per cent in May, the highest level in more than two years, as the eurozone vaccination programme accelerated and the economy continued to improve. This is in stark contrast to what happened at the end of last year, when money markets were betting that a resurgence of the epidemic would force the ECB to loosen policy.

But Christoph Rieger, head of fixed income strategy at Commerzbank, believes that the current market view is not mature. "I still think interest rate cuts are more likely than increases in the next few years," he said, adding that the ECB could provide sufficient liquidity to keep overnight interest rates, the basis of interest rate expectations, close to benchmark rates.

Excess liquidity in the euro zone rose to a record high of 4.18 trillion euros ($5.09 trillion) on Tuesday.