Bond yields in Italy, one of the main beneficiaries of the ECB’s bond-buying stimulus, jumped more than 20 basis points and German bond yields hit three-week highs – more than resorbable falls since the invasion of Ukraine by Russia on February 24.

Europe’s single currency rose initially, but that proved to be short-lived and stock markets remained deep in the red.

This decision came as a surprise as investors had not anticipated any major political announcements given the uncertainty triggered by the war in Ukraine.

The ECB said purchases during the third quarter under the conventional asset purchase program (APP) would be smaller than expected and would end in the third quarter depending on economic data.

The bank raised its inflation projections while reducing its growth outlook given rising commodity prices.

The ECB noted that interest rate adjustments will take “some time” after bond purchases end and will be “gradual”.

Germany’s two-year yield, sensitive to interest rate expectations, rose more than 17 basis points to -0.35% as traders increased bets on ECB rate hikes.

The yield on German five-year bonds turned positive for the first time since Feb. 28, and 10-year yields rose 10 basis points to 0.30%, the highest since Feb. 16.

Eurozone money markets moved to price 45 basis points of ECB hikes in December from 35 basis points before the ECB’s decision and advanced bets on an initial 10 basis point hike in December. July, compared to September before the decision.

“The fact that the tapering is continuing rapidly is a sign that the bar is high for the ECB to delay normalization,” said Antoine Bouvet, senior rates strategist at ING, adding that the ECB forecast is consistent with the rate. bank manager dropping to 0% next year from -0.50% currently.

SALE

The most dramatic moves were in Italy, where two-year yields last rose 21 basis points to 0.19%. They had been as low as -0.05% earlier on Thursday.

The closely watched spread between Italian and German 10-year yields, effectively the risk premium on Italian debt, reached 162 basis points from around 150 basis points before the meeting.

“Rates are right to jump, and especially in the periphery where the (spread) tightening seen since the start of the war in Ukraine was based on a delayed normalization by the ECB,” Bouvet said.

“That assumption turned out to be wrong, we’re back on a widening path.”

A key market gauge of long-term euro zone inflation expectations fell sharply after the decision, to 2.05% from nearly 2.16% earlier on Thursday.

“At the moment (the ECB) is choosing to look through some of the uncertainty created by the war. The most immediate impact will be rising inflation and we could have inflation above 6%, which means the risks of entrenched inflation expectations,” said Marchel Alexandrovich, European economist at Saltmarsh Economics.

The euro rebounded more than half a percent after the ECB statement, but fell back. It was last down 0.5% at $1.10.

Eurozone stocks fell to new session lows after the ECB statement and were down 1.7%, while a gauge of banking shares in the bloc were down 2.25%.

(Reporting by Yoruk Bahceli and Dhara Ranasinghe, additional reporting by Danilo Masoni, Saikat Chatterjee and Joice Alves; Editing by Andrew Heavens and Jonathan Oatis)

By Yoruk Bahceli and Dhara Ranasinghe