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Euro zone yields hit two-month highs on report about ECB's inflation view

09/17/2021 | 06:06am EDT

LONDON, Sept 17 (Reuters) - Euro zone government bond yields reached the highest in over two months on Friday after a report suggested that the European Central Bank expects to hit its inflation target by 2025, and even a subsequent partial denial did not reverse the move.

ECB chief economist Philip Lane revealed in a private meeting with German economists that the ECB expects to hit its 2% inflation goal by 2025, the Financial Times said on Thursday in a report that was partly disputed by the bank.

In addition, euro zone inflation for the month of August was confirmed at a 10-year high of 3%, well above the ECB's target.

Euro zone yields rose broadly on Friday, with Germany's 10-year government bond yield rising to a 10-week high at -0.265%. It was up 3 bps at -0.28% by 1506 GMT. bps

Other euro zone bond yields were also up 2-3 basis points and also hitting similar highs in many cases.

"There's a lot of water that needs to flow under the bridge before we get to 2023, let alone 2025," said Deutsche Bank chief strategist Jim Reid. "However, if a path to such a number does appear in their forecasts soon it will impact ECB messaging going forward, which will be important to markets."

The ECB's response to inflation is currently one of the most talked-about topics in government bond markets.

The central bank has pumped unprecedented amounts of stimulus into the COVID-19-hit euro zone economy. But recent inflation figures have shown a sharp increase towards its goal, which would normally lead to a tightening of policy.

The central bank has been keen to stress it sees consumer price rises - such as Friday's euro zone inflation reading - as temporary and that it would be cautious about withdrawing stimulus as the bloc recovers from 2020's recession, but speculation continues to swirl on the subject.

But focus remains on whether inflation may come in higher than expected. That may be the case if supply constraints persist and wages are raised during upcoming negotiations, ECB Vice President Luis de Guindos said on Friday, while Irish central bank chief Gabriel Makhlouf said there is "considerable uncertainty about the persistence of price pressures".

On the data front, U.S. consumer sentiment steadied in early September after plunging in August, though consumers continue to have a bleak view of the outlook amid a stiff bout of inflation.

Consumer inflation expectations remain elevated, ticking up to 4.7% for a one-year horizon and steady at 2.9% for a five-year horizon.

U.S. yields pushed higher following the data, while German bond yields were slightly below the 10-week peak hit shortly before the data release.

(Reporting by Abhinav Ramnarayan, additional reporting by Yoruk Bahceli; Editing by Catherine Evans, Andrew Cawthorne, William Maclean)

© Reuters 2021
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