Euro zone bond yields tick up after ECB cuts but flags caution

(Updates in late European trading)

By Greta Rosen Fondahn and Harry Robertson

Dec 12 (Reuters) - Euro zone government bond yields rose on Thursday after the European Central Bank (ECB) cut interest rates by 25 basis points as expected but President Christine Lagarde stressed the fight against inflation was not over.

Germany's 10-year bond yield, the benchmark for the euro zone, briefly dipped after the ECB's decision, but was last up 4 basis points (bps) at 2.17%. Yields move inversely to prices.

The ECB cut rates for a fourth time this year, with money markets having fully priced in the 25 bp reduction to 3% ahead of the decision, while expectations for a larger cut had been close to zero.

The central bank kept the door open to further easing ahead as inflation closes in on its goal and the economy remains weak.

Yet Lagarde said in the press conference that the central bank remained vigilant about inflation.

"We are getting closer, but we are not done."

She said some inflationary measures are still relatively high, meaning "you have to be cautious".

Germany's two-year yield, which is sensitive to ECB rate expectations, was last up 2 bps to 1.986%, compared to 1.954% before the ECB's announcement.

"She (Lagarde) was pretty hawkish today, leaning against pricing of a larger than 25 bp cut for January," said Arne Petimezas, a research director at AFS Group in Amsterdam.

"She said that the neutral rate wasn't discussed, and clearly drew the line with needing to see lower services inflation." The neutral rate refers to the level at which borrowing costs neither stimulate nor dampen the economy.

Investors were also digesting data which showed U.S. weekly jobless claims rose more than expected last week, although it only had a fleeting impact on euro zone bonds.

Separate data showed U.S. producer price index inflation rose more than expected in November.

Italy's 10-year yield was up 8 bps to 3.284%, after hitting a 28-month low of 3.162% the day before.

Emmanouil Karimalis, rates strategist at UBS, said the fact the ECB expects inflation to still be very slightly above its 2% target in 2027 may have led to some selling of longer-dated bonds.

The spread between Italian and German borrowing costs - a gauge of the risk premium investors demand to hold Italian debt - was 5 bps wider at 111 bps, widening slightly from before the decision. It hit 104.50 bps earlier this week, its lowest since October 2021.

The yield gap between French government bonds and safe-haven German Bunds held steady at 77 bps. President Emmanuel Macron set himself 48 hours to name a new government on Tuesday.

The Swiss National Bank cut its interest rate by 50 basis points on Thursday, its biggest reduction in almost 10 years. (Reporting by Greta Rosen Fondahn and Harry Robertson; additionaly reporting by Stefano Rebaudo and Danilo Masoni; editing by Andrew Heavens, Ed Osmond and Angus MacSwan)