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Euro zone bonds await German inflation, ignore rate- cut comments

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

AMSTERDAM, Jan 28 (Reuters) - Euro zone bonds were little changed on Thursday as focus turned to inflation data, while debt markets continued to brush aside rhetoric from the European Central Bank drawing attention to interest rate cuts.

January’s preliminary inflation in Germany’s Saxony region jumped to 1% year-on-year from 0% in December. The German national reading, due at 1300 GMT, is expected to show a similar trend; a Reuters poll forecasts an increase to 0.7% year-on-year from minus 0.3% in December.

“The market impact of that figure rising into positive territory again should be muted as even the ECB has already flagged it as being mainly mechanical (due to a VAT hike),” ING analysts told clients.

The expiry of a value-added tax cut Germany implemented in July is expected to push up its inflation reading.

Germany’s 10-year yield, the benchmark for the region, was unchanged at -0.55% at 0828 GMT.

Focus was also remained on Wednesday’s statement from ECB governing council member Klaas Knot, who said the ECB was ready to cut its deposit rate further below zero if necessary to keep its inflation target in sight. His words were in particular focus as he is considered a hawkish member of the council.

That was followed by a story by Bloomberg News that reported policymakers were uncomfortable that investors were largely ruling out further rate cuts, and have agreed to emphasize that it remains a viable option, citing unnamed officials.

The report also said, however, that officials are not currently considering a rate cut in the near future.

German 10-year bond yields briefly fell to three-week lows after the headlines on Wednesday, but later retraced those moves.

Money markets have also largely dismissed the comments, pricing a 50% chance of a 10-basis-point rate cut from the ECB in September.

“The moves seem contained ... suggesting that markets are increasingly looking through such verbal interventions given the lack of tangible follow-up in the past,” Michael Leister, head of interest rate strategy at Commerzbank, told clients.

In the primary market, Italy will raise up to 8.75 billion euros from the sale of five- and 10-year bonds. (Reporting by Yoruk Bahceli, editing by Larry King)

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