Borrowing costs rise on Fed's exit from stimulus programme

LONDON, Sept 23 Reuters - Government borrowing costs across the euro area rose on Thursday after the Federal Reserve indicated that it will likely begin reducing its monthly bond buying as soon as November and signalled interest rate hikes would follow faster than expected.

The selling in bond markets, which had pushed prices down and yields up, was modest given that investors were expecting the Fed to start tapering its $120 billion-a - month asset purchase programme soon.

The reminder that the World's most important central bank is currently on the path to exiting its pandemic stimulus has put bond markets on the back foot.

The market brings volatility as the market digests that while nothing has actually changed, the timing of the first hike is now earlier and a more complete taper announcement is more probable from the November meeting, said Padhraic Garvey, regional head of research, Americas, at ING.

In addition, Norway's central bank is expected to become the first central bank in the G 10 group of developed economies on Thursday due to the coronavirus crisis.

Ten-year bond yields were 2 - 3 basis points higher across the single currency bloc.

In Germany, the Euro zone's benchmark bond issuer - - the 10-year bond yield rose 3 bps to - 0.30%, moving back towards more than two month highs hit earlier this month.

The Bank of England, which announces its latest rate decision later in the day, is also in focus as a rise in gas prices challenges the view that a spike in inflation is temporary.

European Central Bank policymakers who spoke earlier this week said they still see the recent inflation surge as benign but acknowledge risk that price growth can exceed their relatively temporary projections.

Flash purchasing managers' index PMI in the euro area is likely due out in the morning and will also be watched closely by markets keen to assess just how long rising inflation could last.