The European Central Bank could be about to go big on its first rate hike in 11 years

The ECB has announced it will be hiking rates in July and September to counter record inflation.

The European Central Bank is expected to have candid discussions about the size of its first rate hike in 11 years on Thursday.

The euro climbed to almost a two-week high and euro zone government bond yields jumped on Tuesday morning after a report that the euro zone's central bank may opt for a 50 basis point hike instead of the 25 basis point hike that was penciled in.

Mark Wall and his team atDeutsche Bank Research said in a recent note that it is possible that the euro zone's central bank wants to raise its benchmark interest rate by 50 basis points.

He said that the option of a 50bp hike helps in negotiating the details of a strong anti-fragmentation tool.

Italy is facing another political crisis and the details of the new anti-fragmentation tool will be closely watched.

With exceptional circumstances the euro area finds itself in, the president of the European Central Bank is likely to stress the temporary nature of the instrument.

President Lagarde will have to walk a fine line because of the political situation in Italy.

The new tool and rate hike would come as the European Central Bank deals with price stability. The euro zone inflation print for June came in at 8.6%, up from 8.1% in May, and German producer prices in June were 34.7% higher than a year ago. There are some signs that things may be getting better.

The prices of intermediate goods did not increase as much as before. Commerzbank analysts said that the year-on-year comparison fell for the second month in a row due to lower prices of metals.

The hope is that the latter will peak in the coming months, as intermediate goods are ahead of consumer goods prices in this cycle.

There is a risk of gas disruption in the next weeks and the economic outlook is very uncertain at this time. Europe is bracing for an extended shutdown of Russian gas supplies as maintenance on the Nord Stream 1 line continues.

It is feared that the suspension of deliveries could be extended beyond the 10 day time frame.

If wage acceleration and continued high energy prices result in rising inflation expectations, the euro area's central bank may have to keep raising interest rates.

The policy rate should be raised to the bottom of the range of estimates of the natural rate to address the inflation outlook.

This article was contributed to by two people.