The European Central Bank is set to raise interest rates at its July meeting
Eurozone government bond yields fell yesterday after lower-than-expected inflation data triggered expectations of a less aggressive path of monetary tightening.
German consumer prices cooled off in June, the first month that the effects of government measures to dampen high fuel prices were included.
Data from Spain showed that 12-month inflation rose to 10.2pc in June, the first time it surpassed 10pc since April 1985, from 8.7pc the previous month.
Rohan Khanna, a research strategist at UBS, said numbers for North-Rhine Westphalia (NRW), Germany’s most populous state, which showed the first monthly price decline for months, “might be a turning point that could moderate the approach of the European Central Bank”.
However, it is probably “too early to extrapolate ahead of Friday’s euro zone (inflation) numbers”, he added.
Data from NRW, used to calculate a preliminary inflation figure for Germany, showed a 0.1pc monthly decline in June, the first one since November 2021.
Germany’s 10-year government bond yield, the benchmark for the euro zone bloc, fell 7 basis points (bps) to 1.57pc after dropping as much as 9.5 bps early in the session.
“The ECB is under pressure to deliver (rate hikes), and inflation will keep pressure on them,” said Chris Attfield, European rates strategist at HSBC.
“The euro area economy is running less hot than in the U S, and the window to hike is closing: but the narrative will probably change by the end of the year if inflation subsides and economic growth slows down,” he added.
German bond yields jumped by about 20 basis points (bps) earlier this week on inflation fears, with ECB president Christine Lagarde not sounding cautious about growth risks.
Analysts said the ECB was caught between a rock and a hard place as it balances the need to tame inflation against the risk of triggering a recession.
Central bank speakers at the ECB Forum in Sintra, Portugal, remained under the spotlight as analysts watched for any hint about the ECB potentially moderating its hawkish tone.
Italy’s 10-year government bond yield fell 10 bps to 3.56pc, with the spread between Italian and German 10-year yields tightening to 199 bps.
Analysts expect the spread to remain around 200 bps before the ECB’s July meeting.