German Bonds Gain, Euro Slips As ECB Slows Rate Hiking Pace

One and two euro coins sit in this arranged photograph in London, U.K., on Tuesday, Sept. 19, 2017. The euro climbed 0.3 percent to $1.1986, the strongest in more than a week. Photographer: Chris Ratcliffe/Bloomberg

(Bloomberg) -- German short-end bonds rallied and the euro slipped after the European Central Bank raised interest rates by a quarter point, slowing the most aggressive hiking campaign in its history.

The yield on the nation's two-year notes — among the most sensitive to monetary policy changes — fell as much as nine basis points to 2.55%, with similar-dated debt from France, Italy and Spain also gaining. The euro extended losses after US economic data which showed unit labor costs rose more than forecast.

The ECB's move on Thursday takes its official deposit rate to 3.25%, the highest since the global financial crisis, from minus 0.5% when the tightening cycle started in July. After the decision, money markets eased wagers on further interest-rate hikes, betting the key rate will peak at 3.70% by September. That compares to a terminal rate of 3.90% expected as recently as last week.

A quarter-point hike was expected by most economists polled by Bloomberg and was fully priced in by money markets, with traders growing more confident of such an outcome after data earlier this week showed underlying inflation in the euro area decelerated for the first time in 10 months. It also follows a same-size increase from the Federal Reserve on Wednesday and comments from Chair Jerome Powell that opened the door for a pause in June but played down the prospect of rate cuts later in the year.

The ECB Governing Council also said it expects to discontinue reinvestments under its Asset Purchase Program as of July.

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