LONDON (Reuters] -Europa’s single currency, and yields of government bonds in the region dropped on Thursday as the European Central Bank announced a reduction in stimulus for the coming months. But it didn’t switch to a more hawkish stance.

As investors believe the ECB will raise rates to stop inflation at 7.5% (well above its 2% target), bond yields are rising.

The ECB ended its most recent meeting by taking cautious steps to unwind the support it had and avoided a rigid schedule. With few details beyond what is expected in the months ahead, it confirmed the direction of travel.

Reacting to the selling of euro, markets bought up bonds from government agencies and reacted accordingly.

With a drop of 0.16% to $1.0869 the euro was negative against its dollar counterpart. The euro had been slightly firmer before the ECB’s decision, trading at $1.0918. It traded at a 5-week low against sterling, slipping 0.14%.

Societe Generale’s currency strategist Kenneth Broux stated that “the knee-jerk pullback of the euro/dollar suggests that some were positioned to receive something more hawkish by the ECB.”

Government borrowing costs in the Euro zone fell dramatically, with yields on two-year German bonds falling almost 4 basis points per day to 0.033% (versus 0.09% prior to the ECB’s statement).

Germany’s 10-year yield on bonds fell to 0.77% earlier in the week, after it reached its highest level since 2015.

Italian yields traded slightly lower than they had earlier that day, after having been sharply higher.

The money markets have reduced rate rise bets, and now prices around 60 bps of tightening per year-end, as opposed to the 70 bps.

Futures dated to July’s ECB meeting are now priced at around 14 bps for rate hikes. This is down from the 20 bps price that was earlier Thursday.

Stocks in the Euro zone held on to gains, and were up 0.5%

Many central banks are intensifying their efforts to combat inflation. Canada and New Zealand raised their rates this week by 50 basis points, which is the largest hikes for either country in over 20 years. South Korea and Singapore tightened policies earlier Thursday.

Expect a U.S. Federal Reserve rate increase of 50 bps in May.

“Excitement ahead of today’s ECB meeting was high,” said ING’s global head of macro Carsten Brzeski but he added that “Europe is different and the ECB is different”.

“Instead, panic response, the ECB keeps on its very gradual normalization which, in our opinion, is bringing an era of negative rates before year’s end and an end net asset purchases during the summer,” he said.