Euro zone bond yields stay lower after ECB rate cut

By Linda Pasquini and Samuel Indyk

June 5 (Reuters) - Euro zone bond yields were lower on Thursday after the European Central Bank cut its main interest rates and lowered its growth and inflation projections, but kept options open for its next meeting in July.

The ECB lowered its deposit rate by 25 basis points to 2%, in line with expectations, having now reduced the rate by a combined two percentage points since June.

But the outlook for further cuts is unclear, given the uncertainty of U.S. trade policy , which has rattled markets since President Donald Trump announced his so-called reciprocal tariffs on April 2.

The European Union and the U.S. remain in talks about a potential trade agreement.

"A further escalation of trade tens euions over the coming months would result in growth and inflation being below the baseline projections," the ECB said in a statement.

Germany's 10-year yield DE10YT=RR, the benchmark for the 20-nation euro zone, was last down 3 basis points at 2.496%, having earlier hit 2.476%, its lowest since May 8.

Germany's two-year yield DE2YT=RR, which is more sensitive to changes in monetary policy expectations, was flat at 1.793%, within its recent tight range.

Money market traders were pricing in about 7 bps of easing at the ECB's next meeting in July, implying around a 28% chance of a quarter-point cut, roughly the same as before Thursday's decision.

But the ECB is still expected to lower borrowing costs at least one more time by the end of the year, which would bring the deposit facility rate to 1.75%.

"July’s policy decision is in the balance and while we've pencilled in another cut for that meeting, it wouldn't be surprising if the Bank paused," said Jack Allen-Reynolds, deputy chief euro zone economist at Capital Economics.

Italy's 10-year yield IT10YT=RR, the benchmark for the euro area periphery, was down 4 bps at 3.459%, briefly hitting its lowest since February 10. The gap between Italian and German yields DE10IT10=RR stood at about 94 basis points.

Meanwhile, data on Thursday showed a larger than expected decline in euro zone producer prices in April compared with the previous month, helped by lower energy prices.