Updates prices, adds comments by ECB chief economist

By Sophie Kiderlin

LONDON, June 18 (Reuters) - Euro zone government bond yields were broadly steady on Thursday as traders weighed a hawkish shift from the Federal Reserve in a busy week for global central banks, while the U.S. and Iran said they had signed a deal that would reopen the Strait of Hormuz.

Yet some tensions appeared to remain, even as the U.S. and Iran released an interim agreement to end the war, with President Donald Trump threatening to resume attacks and kill Iranian officials if they failed to honour their commitments.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone, was flat at 2.9254% after declining for five consecutive days. That rally - yields move inversely to prices - was the longest since mid-February.

The conflict had seen government bonds come under pressure, with yields jumping as the outlook for inflation and interest rates shifted due to the war-related oil price shock.

The German 10-year yield is still close to 30 basis points above its pre-war levels.

Brent crude futures LCOc1 were last down around 3.1% at $77.05 a barrel, trading around early-March levels.

EYES ON CENTRAL BANKS' REACTIONS TO IRAN WAR

Another driving force for markets this week has been central bank interest rate decisions, especially the debut meeting for new Federal Reserve Chairman Kevin Warsh, appointed by Trump with an expectation that he would deliver the rate cuts the president has called for.

However, the Fed held interest rates steady on Wednesday, as expected. And new quarterly projections showed that nine policymakers now see a hike in rates by the end of 2026, while an updated policy statement removed language that had been used to flag the likelihood of further reductions in borrowing costs this year.

Short-term U.S. Treasury yields rose sharply on Wednesday as expectations for tighter Fed policy grew, but edged lower again on Thursday.

"Aside from the (unanimous) decision itself, Warsh already left some marks," said Erik Liem, rates strategist at Commerzbank, noting that the new Chair does not seem to think forward guidance is a good tool.

"The monetary policy statement is much more streamlined and concise," he said, adding that the Fed would restrict its communication to key information.

The Swiss National Bank and Bank of England both left interest rates unchanged on Thursday. The European Central Bank last week raised rates, to 2.25% from 2%, with the Bank of Japan following suit earlier this week.

ECB chief economist Philip Lane said on Thursday that the euro zone's economy may now be able to withstand slightly higher interest rates without losing steam, with the upper end of the neutral range for the central bank's benchmark rate - which neither stimulates nor curbs growth - rising from 2.25% to 2.50% based on bond market prices.

His comments may be taken as a sign the ECB can afford to tighten further, although Lane stressed he was referring to the longer term.

Markets have been paying close attention to comments from policymakers as they have tried to assess what impact the Iran war might have on the economy, with worries about rising inflation, higher rates and weaker economic growth taking hold.

Money markets were last pricing in at least one more rate hike from the ECB this year, with a chance of a second.

The yield on the German 2-year bond DE2YT=RR, which is more sensitive to rate and inflation expectations, was last up 2.3 basis points at 2.6061%.