However, expectations for the terminal rate are still mixed, at between 3.5% and 4%. Germany's 10-year government bond yield was roughly flat at 2.249%, around 52 bps below its highest level since July 2011 hit in early March. Yields in 10-year U.S. Treasuries are around 70 bps below their 2023 high of 4.09% as the market bets the Fed will pause its rate hiking and start cutting rates sooner than expected as regional bank stocks kept falling.
Analysts expect fears of a banking crisis to prevent the Fed from further tightening its policy. The Fed's Federal Open Market Committee (FOMC) will announce its decision on interest rates at 1800 GMT on Wednesday, while the ECB will hold its meeting on Thursday. "Inflation data, especially sticky service, do not give the ECB the ability to signal any pause yet," said Davide Oneglia, an economist at TS Lombard. "The bigger question remains where the ECB will stop. The answer depends mostly on a mid-year U.S. recession materialising and on the Fed response to it, which have big implications" for euro area growth and equities' performance, he added. Analysts said the ECB's Bank Lending Survey (BLS) did not make a case for a 50 bps rate hike as it suggested that euro area lending conditions continued to tighten at a rapid pace in the second quarter, even if the impact of the recent banking stress remained subdued. Euro zone inflation accelerated last month but underlying price growth eased unexpectedly. Italy's 10-year yield was down 2 bps at 4.141%, while the closely watched spread between Italian and German 10-year yields - a gauge of investor sentiment towards the euro zone's more indebted countries – was at 188 bps. Money markets price in the deposit facility rate to peak at around 3.7% in September 2023. UBS sees a terminal rate at 3.5% as inflation data was "not stronger than anticipated," but with a "meaningful risk that the ECB would need to hike by another 25 bp in July," implying a terminal rate of 3.75%, said Anna Titareva economist at UBS. Analysts also expect the ECB to deliver hawkish signals by saying there is "more ground to cover" while signalling discomfort with the high inflation numbers and the speed of its quantitative tightening measures might accelerate from July. "Wages are likely to rise strongly in Europe, with indexing and other backward-looking wage awards giving a further boost to consumer spending power," said Steven Bell, chief economist EMEA at Columbia Threadneedle. "Consequently, the ECB’s job is not done. We expect a succession of interest rate hikes through the rest of the year." (Reporting by Stefano Rebaudo, editing by Barbara Lewis and Sharon Singleton)
