Euro zone yields rise ahead of ECB as oil above $110 fires up inflation fears

By Amanda Cooper

LONDON, March 19 (Reuters) - Euro zone government bond yields rose on Thursday ahead of a European Central Bank rate decision, as global bonds and stocks sold off in light of another jump in the oil price and after the Federal Reserve forecast higher inflation.

An Israeli attack on Iran's largest natural gas field on Wednesday pushed the crude price above $110 a barrel, sending fresh shockwaves through markets.

On Wednesday, the Fed left interest rates unchanged, but forecast higher inflation, and individual projections showed a "meaningful" number of policymakers see less chance of more rate cuts this year than they did three months ago, as the ongoing Middle East conflict clouds the outlook.

In early trading on Thursday, German 10-year yields rose nearly 5 basis points to 2.98%, challenging last week's 2-1/2-year highs, while two-year yields were up 6 bps at 2.5%, at their highest since August 2024.

A slew of central banks, including the Swiss National Bank and the Bank of England, deliver rate decisions on Thursday along with the ECB, which is not expected to make any changes to monetary policy.

Markets show traders believe the ECB will deliver at least two rate hikes this year, from having priced around a 40% chance of a cut in 2026 prior to the war erupting.

ECB President Christine Lagarde has said the central bank will do what is necessary to keep inflation from running away, and investors will be looking for any sign from her of how current market pricing stacks up against policymakers' expectations.

"Even if good arguments can be made to look through the turmoil, it is very unlikely that hikes will be taken off the table at this stage. So the question will be rather to what degree Lagarde can keep pace with the already hawkish market pricing," ING strategists Benjamin Schroeder and Michiel Tukker said in a note.

Elsewhere, Treasury yields rose in response to traders cutting the chances of two Fed rate hikes this year, leaving two-year notes up 6 bps on the day for a yield of 3.803% .

Within the euro zone, Italian 10-year yields, which have risen by more than 50 bps since the start of the Middle East war, were up another 4.7 bps at 3.791%. (Reporting by Amanda Cooper; Editing by Andrew Heavens)