The ECB has lifted rates at each of its past seven meetings to fight a historic surge in consumer prices and policymakers have signalled further hikes to come as inflationary pressures remain. But the bank slowed the pace of hikes to 25 basis points (bps) last week. In a choppy day, the German 2-year yield , more sensitive to expectations for policy rates, edged higher to 2.66%. Germany's 10-year government bond yield , the euro zone's benchmark, was one basis point higher at 2.33%. ECB members on Tuesday said they saw the cost of borrowing continuing to climb in the euro zone as the fight against inflation had not been won.
Interest rates in the euro zone should rise further, the head of the German central bank Joachim Nagel told the Frankfurter Allgemeine Zeitung (FAZ) newspaper in an interview published on Tuesday. ECB policymaker Peter Kazimir said the central bank might need to raise rates for longer than currently anticipated, and September might be the earliest moment when policymakers could judge whether rate hikes have been effective. "The ECB plans to hike more than once, and an eventual pause is more likely alongside fresh staff projections in September rather than in July," said Aman Bansal, European rate strategist at Citi.
"The front-end looks too rich in this context in our view, especially given the strength of inflation momentum," he added. The September ECB euro short-term rate (ESTR) forward was at 3.58%, implying market expectations for the ECB deposit facility rate to peak at around 3.68%. The deposit rate is currently at 3.25%. The spread between Italian and German 10-year yields - a gauge of investor sentiment towards the euro area's most indebted countries - widening to 193 bps. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ ESTRfwd ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Stefano Rebaudo in Milan and Joice Alves in London; Editing by Alison Williams and Mark Potter)
