Time to taper? Euro zone bond markets brace for ECB shift

LONDON (Reuters) - Government bond yields in the euro area edged up on Thursday as the European Central Bank prepared to take another step towards ending its unprecedented stimulus scheme this year.

Fifty-euro notes are seen at the Belgian Central Bank in Brussels in this December 8, 2011 file photo. REUTERS/Yves Herman

The ECB will debate whether to end its 2.55 trillion-euro (2.2 trillion pounds) bond-buying scheme by the end of the year and is expected to signal a policy shift, following hawkish comments from some top ECB officials last week.

This comes a day after the Federal Reserve raised U.S. interest rates as expected and signalled two more increases this year, citing higher inflation.

According to Deutsche Bank analysts, the Fed hike means a total of 15 rate rises in 2018 from the 23 biggest central banks globally, compared with just seven rate cuts. They say the ratio of hikes to cuts is now 2.1 - the highest since 2011.

Whether ECB policymakers take a decision on Thursday or hold off until July appears secondary. They have long argued that the scheme should be concluded and the policy focus shift to the expected path of interest rates.

“The ECB will map out the end of asset purchases today,” said KBC rate strategist Mathias van der Jeugt. “Time is running against the ECB and it would be wise to lay out policy for the remainder of the year so any unexpected events over the summer, for instance from Italy, don’t interfere with its plans.”

(Graphic: When will the ECB hike interst rates? -

Most 10-year euro zone bond yields rose around 2 basis points. Germany's Bund yield traded at 0.50 percent DE10YT=RR, just below an almost three-week high hit earlier this week.

Any changes should appear in a policy statement at 1145 GMT. More details, including the latest economic forecasts will come at ECB chief Mario Draghi’s press conference 45 minutes later.

The biggest complication for the ECB could be the increasingly murky economic outlook. The euro zone faces a developing trade war with the United States, a populist challenge from Italy’s new government and softening export demand.

“It’s all going to be about how strong Draghi’s forward guidance is,” said Patrick O’Donnell, an investment manager at Aberdeen Asset Management.

“How Draghi manages essentially not to get the market too excited about rate hikes next year but be upbeat enough to end QE this year is the tightrope he has to walk.”

Money markets have scaled back their rate-hike expectations recently, with a 10-basis-point rise in the ECB's deposit rate only fully priced in by September 2019. ECBWATCH

What Draghi has to say about Italy is also likely to be in focus. A market rout that briefly pushed long-dated Italian bond yields to four-year highs in late May.

Italian bonds underpeformed their peers on Thursday with 10-year yields climbing 7 bps to around 2.88 percent IT10YT=RR.

Reporting by Dhara Ranasinghe; Editing by Larry King