ECB's tepid inflation forecast pushes Bund yields to 3-week low

LONDON: German 10-year bond yields fell to a three-week low on Thursday as the European Central Bank only tentatively upgraded its forecast for future inflation, just as oil prices skirted away from $50 a barrel.

The ECB nudged up its inflation forecast for 2016 but predicted price growth would remain below target through 2018 as it struggles with cheap energy feeding into the price of other goods and services.

It raised its 2016 inflation projection to 0.2 percent from 0.1 percent and kept its 2017 forecast at 1.3 percent. For 2018, the end of its forecast horizon, the ECB stuck to its prediction of an inflation rate of 1.6 percent - still short of its near 2 percent target.

At a separate Organization of the Petroleum Exporting Countries meeting there was no apparent change of crude production policy, deflating hopes for an output quota and sending Brent prices down over 1 percent to the day's low of $48.84.

"Oil prices are falling again so the move in bond yields to some extent has to do with that...and the (ECB's) upward revision to inflation is very limited," said Patrick Jacq, Europe rate strategist at BNP Paribas.

Germany's 10-year yields fell 3 basis points on the day to 0.11 percent, a three-week low and a step closer to this year's low of 0.075 percent. The euro weakened to $1.1144.

While oil prices fell back on Thursday, they have climbed nearly 80 percent since January and many economists expected the ECB to revise their 2016 forecasts for consumer price growth higher as a result.

"We are surprised that the inflation forecasts have not been revised higher, both if you think about the oil price developments... and all the measures that they implemented in March and still are implementing now in June," said Anatoli Annenkov, euro area economist at Societe Generale.

Societe Generale expects euro zone inflation to average 0.4 percent in 2016, higher than the ECB's 0.2 percent outlook.

The ECB left its main interest rate unchanged in negative territory and said it would press on with its unprecedented stimulus effort.

Money markets price in roughly a 60 percent chance of a 10 basis point cut in the ECB's deposit rate by the end of the year, little changed from before the ECB meeting earlier in the day.

GREEK YIELDS RISE

Greek government bond yields meanwhile rose after the ECB said it would take no decision on whether to reinstate a cheap funding lifeline to Athens banks until the country finalises reform agreements with international lenders.

Such a waiver was expected after Greece agreed terms on new bailout loans with creditors last month, and would have been seen as a first step in the country's plans to return to bond markets next year.

Greek two-year bond yields rose 17 bps to 7.33 percent and stocks shed 1 percent.

Greece's Prime Minister Alexis Tsipras said he expected the ECB to reinstate the waiver after the official conclusion of the bailout review and hoped Greece could be included in the quantitative easing programme (QE) possibly as early as July.