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By Abhinav Ramnarayan and Helen Reid
LONDON, March 29 (Reuters) - The euro, the bloc’s government bond yields and banking stocks fell on Wednesday after sources told Reuters that European Central Bank policymakers are wary of making any new change to their policy message in April.
Small tweaks at the ECB’s meeting earlier this month raised the spectre of a surge in borrowing costs for the bloc’s indebted periphery and policymakers are keen to reassure investors that their easy-money policy is far from ending.
“The market was getting ahead of itself by pricing in rate hikes in 2017 and this story has confirmed that view,” said Mizuho strategist Antoine Bouvet. “If we’re talking about potential hikes it’s only in 2018 at the earliest that we can expect this.”
Indeed, money markets now no longer fully price in an ECB rate rise next March, while expectations for rate increase in December were scaled back after the ECB report.
The euro sank to a week’s low against the dollar on the report, down 0.7 percent to $1.0743. It also hit its lowest in a month at 119.05 yen.
Europe’s government bond yields fell broadly, with benchmark German 10-year yields at a three-week low of 0.34 percent, down 4 basis points on the day.
Euro zone banking stocks hit a session low and were last down 0.6 percent. They underperformed the broader euro zone stock market, which was up 0.1 percent.
“If rate expectations move down, banks’ net interest income gets pushed down. If you’ve got lower for longer rates then it’s much tougher for banks to make money. People are trading accordingly,” said a banking analyst who preferred to remain unnamed.
Euro zone government bond yields have been rising steadily since October on expectations that increased growth and inflation will lead to a change in the ECB’s ultra-loose monetary policy stance.
Earlier this month, the ECB said there was no longer a sense of urgency to prop up the euro zone economy, while some officials had raised the prospect of a rate rise before quantitative easing ends.
Peripheral bonds, seen as the most vulnerable to any ECB tightening, also rallied.
Portugal’s 10-year government bond yield fell to 3.69 percent, its lowest level since early January. (Additional reporting by John Geddie and Dhara Ranasinghe; Editing by Ken Ferris)