LONDON, Jan 15 (Reuters) - Euro zone government bond yields rose on Monday after the European Central Bank warned that cutting interest rates too fast may prove self-defeating.
Markets have been quick to bet that the ECB would slash interest rates this year with inflation seemingly close to falling back towards target, but policymakers have urged caution and tried to downplay expectations.
The central bank's chief economist Philip Lane stressed in an interview with Italian daily Il Corriere della Sera published on Saturday that cutting rates too fast could fuel a new wave of inflation, forcing the ECB to then raise rates even more.
"A false dawn, too rapid a recalibration, can be self-defeating," Lane said.
ECB euro-short term interest rate (ESTR) forwards fully price the first move in April, with the chances of a cut in March at about 30%.
In total, markets are pricing in around 150 basis points (bps) of cuts this year.
"It's interesting to see one of the more dovish members of the governing council not overly dovish," said Anders Svendsen, chief analyst at Nordea, on Lane's comments.
"The bigger picture will depend on incoming key figures and so far what we've got this year hasn't really been enough to change the narrative fundamentally," Svendsen added.
Other influential policymakers are expected to deliver talks this week, including ECB President Christine Lagarde at the World Economic Forum in Davos on Wednesday, before the central bank enters its quiet period on Thursday before next week's meeting.
Germany's 10-year yield, the benchmark for the euro zone, was last up 4 bps at 2.182%.
The country's policy-sensitive two-year yield was up 3.5 bps at 2.549%.
Heavy bond issuance, which some analysts said has been fuelling the unease in euro zone bond markets in January, is set to moderate slightly this week, with auction volumes of about 27 billion euros expected.
"As we have argued before, the supply impact starts to fade after the first week of January as the market already anticipates the heavy issuance," said Mohit Kumar, chief European economist at Jefferies.
"Seasonality still remains positive fixed income till end January and any sell-offs are likely to be bought," Kumar added.
Italy's 10-year bond yield, the benchmark for the euro zone periphery, rose 5.5 bps to 3.782%, pushing the closely watched gap between Italian and German 10-year yields wider to around 159 bps. (Reporting by Samuel Indyk; Editing by Alex Richardson)
