By Marius Zaharia
LONDON, Oct 15 (Reuters) - German Bund yields hit two-week lows on Thursday after European Central Bank policymaker Ewald Nowotny said new efforts were needed to boost inflation.
Governing council member Nowotny, who is also Austria's central bank governor, said any additional set of instruments needed should include both structural reforms and measures to boost demand.
The comments, which add to growing expectations that the ECB could boost its trillion euro bond-buying stimulus programme, knocked down the euro and pushed down Bund yields, the benchmark for European borrowing costs, to two-week lows of 0.528 percent.
"The market is concerned about the growth outlook globally and this morning we get comments from the ECB that were very dovish," said Jussi Hiljanen, head of fixed income research at SEB.
"You definitely can't rule out another cut in the deposit rate ... and the market has also moved to discount a quite high probability that the QE (quantitative easing) programme could be extended."
Euro zone money markets are discounting about a 50 percent chance of a deposit rate cut in the coming year, despite the fact that ECB President Mario Draghi said a year ago official interest rates cannot move any lower.
Bund yields fell over 5 basis point on Wednesday after weak U.S. retail sales and producer prices data propped up bets that the Federal Reserve would delay a rate hike until next year.
The first U.S. rate increase since 2006 is now expected in March 2016, having been repeatedly postponed in recent months as worries intensify over the impact of China's economic slowdown and low commodity prices.
"With Fed hike expectations diminishing, euro/dollar strength in turn revived hopes for a dovish ECB message and money markets started discounting rate cuts further down the road," Commerzbank rate strategist Benjamin Schroeder said.
Spanish 10-year yields were flat as Madrid sold 4 billion euros in 2018, 2025 and 2030 bonds in an auction which drew strong demand at lower borrowing costs.
The government has now sold around 89 percent of its end-of-year target for medium- and long-term issuance.
Economy Minister Luis de Guindos said on Thursday the government will lower its net debt issuance target for this year to 48 billion euros from 51 billion. The target had already been reduced from 55 billion euros.
Rabobank strategists said the plans reflect Spain's strengthening economy, which may warrant a rating upgrade from Moody's on Friday. Its current rating with Moody's is Baa2.
Rival agency Standard & Poor's hiked Spain's rating to BBB+ from BBB two weeks ago.
Portuguese bonds continued to underperform as the country is yet to have a government in place after the Oct. 4 elections. Ten-year yields were up 5 bps at 2.50 percent.
France also sold bonds on Thursday. (Reporting by Marius Zaharia; Editing by Jeremy Gaunt)