ECB's Latest Moves Stir Euro Zone Bond Yields

Euro zone government bond yields rose after the European Central Bank cut interest rates by 25 basis points and adjusted economic forecasts. The ECB's cautious approach to monetary easing, due to rising service inflation, slightly altered market expectations. Analysts predict a consistent policy direction pending new economic releases.

Euro zone government bond yields edged higher on Thursday as the European Central Bank reduced interest rates by 25 basis points and adjusted its economic forecasts. This move led markets to temper their expectations on the ECB's easing cycle. Despite slowing inflation and faltering growth, the ECB provided scant indicators on future steps, with investors banking on steady policy easing.

Charles Seville, senior director in Fitch Ratings' economics team, stated, "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." As a result, money markets adjusted their expectations to 38 basis points of easing by year-end, nominally less than before.

Massimiliano Maxia, fixed income specialist at Allianz Global Investors, noted, "The central bank changed its economic forecasts marginally while revising inflation slightly higher. This backdrop supports expectations for one 25-basis-point cut every quarter." German and Italian bond yields saw modest increases post-announcement, reflecting a broader anticipation of the ECB's cautious approach contingent on forthcoming economic data.

(With inputs from agencies.)