Meanwhile, China set a modest target for growth this year, triggering expectations for a possible adverse impact on the bloc's economy and reviving hopes about a potential slowdown in the pace of the European Central Bank's tightening. Germany's 10-year government bond yield dropped 4.5 basis points (bps) to 2.676%. It hit its highest level since July 2011 at 2.77% last week. However, forwards on the European Central Bank's euro short-term rate still peaked in November 2023 at around 3.9% , implying a depo rate at 4% by year-end. ECB President Christine Lagarde said the flagged rate increase of 50 bps in March is now "very, very likely," but she also warned that underlying inflation could stay uncomfortably high in the coming months.
"The ECB doesn't have a ceiling, but an inflation target of 2%," Lagarde added, answering a question about the central bank raising rates to 4% or above this level. Powell's remarks will come a few days before the FOMC blackout period starting March 11. Analysts expect Powell to reiterate that if economic data continues to surprise to the upside, the rate peak may need to be higher than the 5.125% policymakers had indicated in December. "Still, markets will be looking for signs that 50bp hikes can be priced back into the curve. We doubt they will be ruled out," ING strategists led by Padraig Garvey said in a note. Italy's 10-year yield fell 7.5 bps to 4.465%, with the spread between Italian and German yields tightening to 177 bps. The ECB started running the bonds off its balance sheet last week at a rate of 15 billion euros per month on average. Strong investor inflows into bond markets this year mean traders and bankers are confident the ECB will have a smooth start to unwinding its substantial bond holdings, but the long-term impact of its "quantitative tightening" is a big unknown. (Reporting by Stefano Rebaudo, editing by Ed Osmond)
