LONDON, Jan 25 Reuters A blazing rally in European stocks and government bonds has gone too far, the chief investment officer of the region39;s largest asset manager said on Wednesday, warning that markets are ignoring the possibility of euro zone rates going as high as 4.

Markets are pricing a kind of Goldilocks scenario, Amundi CIO Vincent Mortier told Reuters, where there is still some kind of GDP growth around, earnings remain decent and central banks take a pause from aggressive rate rises.

MSCI39;s broad index of European shares outside the UK is up 8.8 so far in January. The rally coincided with China39;s relaxation of stringent coronavirus rules and a sharp fall in European gas demand during a mild winter, assuaging worries of a deep recession.

But markets are ignoring the risks of sustained high inflation and a rate rise campaign by the European Central Bank that would hurt consumer spending and corporate margins, Mortier said.

The ECB meets next week and is expected to lift its deposit rate by 50 basis points to 2.5.

Amundi39;s current base case is for the ECB to hike to 3.25, although Mortier said he personally believes they could go to 4.

We think inflation will surprise in its stickiness, he said. The ECB is determined to be hawkish.

Having initially predicted that equities would fall in the first half of 2023 before recovering, Amundi now chose a circumflex to illustrate their path, Mortier said, referring to the French accent that is shaped like…