Euro zone bond yields rises to 2-week high on renewed inflation fears

By Joice Alves

LONDON, Sept 6 (Reuters) - Euro zone government bond yields rose on Wednesday to a two-week high on the back of an European Central Bank (ECB) survey showing consumer expectations for inflation edged up, adding to the case for another interest rate hike.

The ECB's Consumer Expectations Survey showed inflation expectations three years ahead rising to 2.4% in July from 2.3% in June, above the ECB's 2% target.

Money markets are still pricing in an around 33% chance of a 25 basis points (bps) rate hike at the Sept. 14 meeting.

But ECB governing council member Klaas Knot told Bloomberg on Wednesday investors betting against an interest rate increase next week are possibly underestimating the likelihood of it happening.

"Higher inflation expectations from the ECB survey and extension of oil production cuts from Saudi and Russia added to the bearish pressure," said Mohit Kumar, interest rate strategist at Jefferies.

Adding to inflation fears, oil prices jumped more than 1% on Tuesday amid jitters arising from supply cuts from Saudi Arabia and Russia.

Germany's 10-year government bond yield, the benchmark for the euro zone, rose to its highest level since Aug 23, and was last up 2.5 bps at 2.63%.

Italy's 10-year government bond yield, the benchmark for the euro area periphery, also rose to a two-week high, but its was last down flat on the day at 4.34%.

The spread between Italian and German 10-year yields - a gauge of investor sentiment towards the euro zone's more indebted countries - was at 170 bps after reaching its widest level in more than two weeks.

Investors have been avoiding increasing their bets on a hike from the ECB as data point to a deteriorating economy in the euro zone.

Data showed that industrial orders in Germany, the bloc's richest economy, fell more than expected in July.

Germany's IfW economic institute said that the economic outlook for the year had clouded over, and it is now predicting that the economy will shrink by 0.5% instead of 0.3% previously. (Reporting by Joice Alves Editing by Peter Graff)