The European Central Bank (ECB) today voiced growing caution over the euro zone's inflation outlook but stuck to its positive view on growth prospects.
Financial markets viewed the ECB's comments on inflation, and the lack of a reference to prices falling below its 2 per cent ceiling, as even more hawkish than last week's statement.
This pushed euro zone government debt yields to their highest level in nearly a month.
The ECB said in its monthly report, which closely echoed the statement issued after last week's policy meeting, that price prospects were not as good as a few months ago but that it still expected inflation to slow down in the coming months.
The report pushed euro zone government bond yields higher as the market saw it as a shift towards a less rosy outlook for inflation, raising the spectre of higher interest rates.
"The ECB monthly bulletin is slightly more hawkish and what we saw last week from [ECB president Wim] Duisenberg's press conference seems to have prevailed here," said Ms Monique Wong of UBS Warburg in London.
The ECB kept its key rate at 3.25 per cent last week, unchanged since November, but a change of tone on inflation convinced markets that it may start reversing last year's 150 basis points worth of rate cuts sooner rather than later.
