Euro zone yields edge higher after ECB rate cut, projections
Adds comment, updates prices
By Stefano Rebaudo
Sept 12 (Reuters) -Euro zone government bond yields edged higher on Thursday after the European Central Bank cut interest rates and tweaked its economic forecasts, leading markets to slightly reduce their bets on the ECB easing cycle.
The central bank cutagain by 25 basis points as inflation slows and economic growth falters, but provided almost no clues to its next step.
"We forecast the ECB to cut rates cautiously given that inflation in services, which makes up the largest part of the consumer basket, is running at over 4% and short-term momentum is actually increasing," said Charles Seville, senior director in Fitch Ratings' economics team.
Money markets priced in 32 basis points of monetary easing by the end of this year, compared to 35 bps before the ECB statement. That implies one 25-basis-point move and around a 30% chance of a further cut, from 40% earlier.
The December 2024 euro short term rate (ESTR) forward EURESTECBM3X4=ICAP was last at 3.085% from 3.05% before the ECB statement. The deposit facility rate will be set at 3.50% and is usually around 10 bps higher than the ESTR.
"The central bank changed its economic forecasts marginally while revising inflation slightly higher," said Massimiliano Maxia, fixed income specialist at Allianz Global Investors.
"This backdrop supports expectations for one 25-basis-point cut every quarter," he added.
There is a prevailing view among analysts that the ECB will implement 25 bps of easing each quarter, contingent on the release of new economic forecasts.
"Overall, we expect the deposit rate to stand at 2.50% percent in 12 months' time," said Ulrike Kastens, European economist at DWS.
German 10-year Bund yields DE10YT=RR were up 5 bps at 2.15% - they were at 2.13% before the ECB statement - after falling 5 bps on Wednesday.
They reached 2.086% on Wednesday, the lowest level sincethe market turmoil of early August.
The bloc'sborrowing costs dropped on Wednesday, tracking moves in U.S. Treasuries after data showed U.S. underlying inflation remained sticky, curbing expectations for a significant interest rate cut by the Federal Reserve next week.
Germany's 2-year Schatz yields DE2YT=RR were up 9 bps at 2.22%, after dropping 7 bps the day before.They were at 2.18% before the ECB decision.
Their premium over 10-year debt was at 7.5 bps DE2DE10=RR, from 6.8 bps before the central bank's statement. It hit 2.6 bps on Wednesday, its narrowest reading sinceNovember 2022.
Italian 10-year yields IT10YT=RR, which on Wednesday fell to their lowest level sinceAugust 2022, were up 1.5bps at 3.55%, leaving their premium over Bunds at 139 bps.
They were at 3.53% before the ECB's statement, with the premium over Bunds at 140 bps.
Reporting by Stefano Rebaudo; Editing by Alexander Smith, Paul Simao, Alexandra Hudson
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