Federal Reserve Chair Janet Yellen’s call for caution on interest rate hikes has heaped pressure on the European Central Bank, driving long-term inflation expectations and German Bund yields closer to their record lows.
Yellen said on Tuesday that inflation had not yet proven durable against the backdrop of looming global risks to the US economy. Her remarks pushed down the dollar and sent the euro close to levels where ECB policymakers have in the past raised their dovish rhetoric by a notch.
A stronger euro makes it harder for the ECB to reignite inflation in the eurozone economy, as it means cheaper imports and pressure on exporters, who have led the recovery since the region’s sovereign debt crisis.
The ECB remains unable to convince the market it will come close to achieving its inflation target any time soon, despite cutting interest rates deeper into negative territory and accelerating the pace of asset purchases three weeks ago.
“Yellen sounded very dovish,” said KBC rates strategist Mathias van der Jeugt. “Pressure will definitely be on the ECB ... they obviously don’t like a strong single currency especially given all their efforts to ease monetary policy.”
German 10-year Bund yields, the benchmark for eurozone borrowing costs, fell to 0.127% in early trade, within a whisker of this year’s low of 0.102% and an all-time low of 0.05% hit last year.
Yellen’s comments contrasted with the stance of some Fed officials, who in recent days said the US economy was strong enough to warrant further rate hikes despite uncertainty about Chinese growth and turmoil in the oil market. European money markets attach a probability of about 70% to another ECB rate cut this year, unchanged from before Yellen’s speech.
Executive Board member Benoit Coeure was quoted yesterday by Politico as saying the ECB would not move rates to “absurdly” negative levels and negative rates were not the bank’s main policy instrument, even if further cuts could not be ruled out.
Long-term inflation expectations, as indicated by five-year, five-year breakeven forwards, fell to their lowest in almost a month. The measure, which shows where markets see 2026 inflation forecasts in 2021, traded around 1.42%, just above record lows of 1.36% hit in February.
The ECB targets inflation of about 2%.
Germany will publish its inflation data at 1200 GMT. Regional numbers show the overall figure is likely to be higher than in February, but will remain near zero.
“It looks like a bounceback in Germany after a soft set of February data, but the big picture is still one of very low inflation,” Kenneth Wattret, co-head of European market economics at BNP Paribas, said in the Reuters Global Markets Forum.
“If you can’t generate inflation there, there is not much chance for the rest of the eurozone. The ECB is trying hard but it’s going to be a long wait for inflation lift-off.”
Most eurozone bond yields were 1 to 2 basis points lower.

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