* Consumer price data could add to debate ahead of ECB
* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr
By Abhinav Ramnarayan
LONDON, May 31 Euro zone government bond yields
briefly fell on Wednesday after data showed inflation dropping
well below the European Central Bank's target ahead of a meeting
of policymakers next week.
Inflation in the single currency bloc fell below
expectations to 1.4 percent in May, according to early
estimates, well below the ECB's target of just below 2 percent
and compared to 1.9 percent in April.
This supports the widespread view -- one put forward by ECB
President Mario Draghi on Monday -- that the central bank should
keep its current ultra-loose monetary policy stance in place.
The yields on government debt from Italy and Portugal,
countries seen benefiting the most from ECB stimulus, fell the
most. At one point they were down as much as 2-4 basis points,
outperforming the rest of the euro zone market.
Most other euro zone government bond yields were little
changed as European trading drew to a close, having been lower
for most of the day.
"The inflation numbers haven't been superb, but the overall
bigger picture is that we've moved away from the deflation risk
and we are moving steadily towards the ECB target," said ING
strategist Padhraic Garvey.
"Also, the core inflation rate has been fairly steady around
Inflation excluding energy and unprocessed food -- known in
markets as core inflation because it strips out the effect of
factors such as oil prices -- was at 1 percent compared to 1.2
percent in April.
High-grade euro zone bond yields have dropped in recent days
on below-forecast inflation numbers from Germany and Spain.
Draghi said on Monday that even though risks to euro zone
growth have declined, he was convinced that an extraordinary
amount of monetary policy support was still necessary.
Inflation numbers are under particular scrutiny ahead of an
ECB meeting next week.
Policymakers are divided on the issue although they are set
to take a more benign view of the economy when they meet on June
8 and will even discuss dropping some of their pledges to ramp
up stimulus if needed, four sources with direct knowledge of the
discussions told Reuters.
Investors also had one eye on another central bank, with
U.S. Federal Reserve member Robert Kaplan saying on Wednesday
that weak recent inflation readings are a worry and suggest the
Fed will make slow progress toward its 2 percent goal.
Markets are almost fully priced for a rate hike from the Fed
next month, but there remains uncertainty over how many more
rate rises the central bank can fit in this year.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Reporting by Abhinav Ramnarayan; Editing by Catherine Evans)