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Updates rates, adds comment

By Dhara Ranasinghe and Joice Alves

LONDON, May 11 (Reuters) – Euro zone government bond yields rose on Wednesday after data showing a bigger-than-expected rise in inflation last month in the United States.

Data showing U.S. annual inflation rose 8.3% in April, down from 8.5% a month earlier, but above analyst expectations for an 8.1% rise, triggered a wave of selling in bonds.

Germany’s 10-year Bund yield was last up 1.5 basis points on the day at 1.018% DE10YT=RR, having fallen just below 1%, its lowest level in almost a week earlier.

“I think it is natural to see yields rising after a strong core CPI like we had,” said Peter McCallum, rates strategist at Mizuho.

But capping the yields rally, a 75 basis point hike from the Federal Reserve seems out of sight at this point, McCallum added. “I think there’s enough that the market can look at in that report to not necessarily price too much more hawkishness from the Fed,” he said.

Italian 10-year bond yields also rose after the U.S. CPI data but was last close to their lowest in almost a week hit earlier in the day, at 2.93% IT10YT=RR.

Earlier in the session, yields across the currency bloc fell to their lowest levels in almost a week, with investors taking comfort from signs that any tightening in European Central Bank monetary policy will be gradual.

The ECB is likely to end its bond-buying stimulus programme early in the third quarter, followed by a rate hike that could come just “a few weeks” later, ECB President Christine Lagarde said. nL5N2X32V5

Analysts said the tone of ECB comments on Wednesday suggested a gradual rather than rapid rate-hike path, taking the edge off the aggressive rate-rise bets that drove borrowing costs across the bloc to multi-year highs as recently as Monday.

The ECB’s Francois Villeroy de Galhau said the ECB would start raising rates gradually from the summer. nL5N2X31SB

“One part of the message from the ECB is that rate hikes will start in July, but the other part is that the path will be gradual, which is what Lagarde is suggesting, too,” said Jan von Gerich, chief analyst at Nordea.

In another volatile session for bond markets, a key gauge of the market’s long-term euro area inflation expectations bounced back to almost 2.25% after the U.S. data. It fell to a seven-week low at 2.1939% EUIL5YF5Y=R earlier.

Elsewhere, the European Union priced 9 billion euros of bonds, maturing in 2025 and 2051, according to a memo seen by Reuters from one of the banks managing the syndicated-bond sale.

Germany sold 3.23 billion euros of 10-year Bunds and Portugal auctioned 750 million euros of bonds maturing in 2030. nS8N2UP081

(Reporting by Dhara Ranasinghe; Editing by Hugh Lawson, Kim Coghill and Mark Heinrich)

((Dhara.Ranasinghe@thomsonreuters.com; +442075422684;))

Adds Villeroy, Schnabel

LJUBLJANA, May 11 (Reuters) – The European Central Bank has firmed up expectations that it will raise its benchmark interest rate in July for the first time in more than a decade to fight record-high inflation, with some policymakers even hinting on Wednesday at further hikes after the first.

With ECB policymakers clamouring for a rate hike for weeks, President Christine Lagarde has finally thrown her weight behind such a move, saying the central bank was likely to end its stimulus programme early in the third quarter, followed by a rate hike that could come just “a few weeks” later.

Most other major central banks have already raised borrowing costs but the ECB, which had fought too low inflation for a decade, is still pumping cash into the financial system via bond purchases.

“My expectation is that they should be concluded early in the third quarter,” Lagarde said at a conference in the Slovenian capital.

“The first rate hike, informed by the ECB’s forward guidance on the interest rates, will take place some time after the end of net asset purchases…(and) this could mean a period of only a few weeks.”

Inflation hit 7.5% in the euro zone last month and even measures that strip out food and energy prices rose above the ECB’s 2% target.

“What started as a one-off shock has now become a more broad-based phenomenon,” ECB policymaker Bostjan Vasle said at the same event. “When the circumstances change, the policy response must follow,” the Slovenian governor added.

ECB board member Isabel Schnabel said the ECB needed to act now to protect its credibility and stop inflation expectations, which have risen to 2% or slightly above, from spiralling out of control.

GROWING CALLS

The number of ECB policymakers calling for a July hike has been growing almost every day and on Wednesday alone included board member Frank Elderson, French central bank governor Francois Villeroy de Galhau and Bundesbank president Joachim Nagel. nL2N2X21OO nL5N2X31SB

“I think that from this summer onwards, the ECB will gradually raise its interest rates,” Villeroy de Galhau told France Inter radio.

Estonian governor Madis Mueller also hinted at a series of hikes that could lift the ECB rate on bank deposits, which is currently -0.5%, above zero by the end of the year for what would be the first time since 2014. nF9N2UZ01J

“Even if we go by 25 basis point increments, we may get to a positive rate by the end of the year,” he told Reuters in an interview.

(Reporting By Balazs Koranyi; Writing by Francesco Canepa in Frankfurt; Editing by Toby Chopra and Hugh Lawson)

((@FranCanJourno francesco.canepa@thomsonreuters.com; 004906975651247; Reuters Messaging: francesco.canepa.thomsonreuters.com@reuters.net))