LONDON Euro zone bond yields hit multi-month lows and the euro dipped below $1.12 on Thursday after the European Central Bank cut its forecasts for inflation and said policymakers had not discussed scaling back its massive bond-buying program.
While the ECB lifted economic growth projections, it said it saw inflation of 1.5 percent in 2017 and 1.3 percent in 2018, compared with its March forecasts of 1.7 percent and 1.6 percent respectively. The ECB targets inflation of just under 2 percent.
ECB chief Mario Draghi added that "substantial" amounts of stimulus through its unprecedented asset purchase scheme were still needed and that there was no discussion of future tapering at the meeting.
"The market's initial assessment is that the ECB is not quite as close to policy normalization as previously thought," said Philip Shaw, chief economist at Investec in London.
Euro zone government bond yields fell broadly, with some hitting multi-month lows.
Germany's 10-year yield -- the bloc's benchmark -- hit a six-week low of 0.244 percent DE10YT=TWEB before rebounding late in the day to 0.26 percent.
France's 10-year government bond yield FR10YT=TWEB fell to its lowest since January at 0.64 percent, down 3 bps on the day.
The euro, which had climbed as much as 10 percent in the last five months as the dollar weakened and euro zone growth and inflation picked up, fell back to a one-week low of $1.1195 EUR=EBS after the ECB meeting.
It was around $1.1230 when ECB chief Mario Draghi began speaking, leaving it almost half a percent lower on the day.
"A surging euro was hit by a reality check today as ECB President Mario Draghi took a surprisingly cautious tone in his post-meeting statement, choosing to overlook an improved growth picture and instead focus on lower inflation," said Richard de Meo, managing director of Foenix Partners.
Money market futures rose after Draghi's comments, reflecting a pricing out of investors' rate-hike expectations <O#FEI:> ECBWATCH.
Pricing now suggests investors do not anticipate a hike in the ECB's deposit rate over the next year.
Southern European yields also hit multi-month lows, extending falls from earlier in the day as the chance for snap elections in Italy appeared to recede.
A deal struck among Italy's main political parties over a new electoral law has unraveled, a senior figure from the ruling Democratic Party said after his group lost a parliamentary vote on a proposed amendment.
"This decreases the chances of election this year, and the market seems to be taking the view that bad news later is good news now," said Rabobank strategist Richard McGuire.
"Though yields fell further after the ECB meeting, this was the main driver for peripheral yields today."
Spanish 10-year yields hit their lowest since January at 1.47 percent ES10YT=TWEB, and Italian equivalents fell 12 basis points in their biggest one-day slide since December. IT10YT=TWEB. This cut the Italian yield gap over German benchmarks to its narrowest in a week, at 191 bps.
(Reporting by Jemima Kelly, Abhinav Ramnarayan, Kit Rees, Helen Reid, John Geddie, Dhara Ranasinghe and Ritvik Carvalho; Editing by Nigel Stephenson and Catherine Evans)