Sept 12 (Reuters) - Euro zone government bond yields

edged higher on Thursday after the European Central Bank reduced

interest rates by 25 basis points and tweaked its economic

forecasts, leading markets to slightly reduce their bets on the

ECB's easing cycle.

The ECB eased its policy again as inflation slows and

economic growth falters, but provided almost no clues to its

next step as investors bet on steady policy easing.

"We forecast the ECB to cut rates cautiously given that

inflation in services, which makes up the largest part of the

consumer basket, is running at over 4% and short-term momentum

is actually increasing," said Charles Seville, senior director

in Fitch Ratings' economics team.

Money markets priced in 38 basis points of monetary

easing by the end of this year, compared to 40 bps

before the ECB statement. That implies one 25-basis-point move

and around a 52% chance of a further cut, from 60% earlier. The

deposit facility rate is set at 3.50%.

"The central bank changed its economic forecasts

marginally while revising inflation slightly higher," said

Massimiliano Maxia, fixed income specialist at Allianz Global

Investors.

"This backdrop supports expectations for one

25-basis-point cut every quarter," he added.

There is a prevailing view among analysts that the ECB will

implement 25 bps of easing each quarter, contingent on the

release of new economic forecasts.

The bloc's borrowing costs dropped on Wednesday, tracking

moves in U.S. Treasuries after data showed U.S. underlying

inflation remained sticky, curbing expectations for a

significant interest rate cut by the Federal Reserve next week.

German 10-year Bund yields were up 3 bps at

2.13% - roughly unchanged from before the ECB statement - after

falling 5 bps on Wednesday.

They reached 2.086% on Wednesday, the lowest level since the

market turmoil of early August.

Germany's 2-year Schatz yields were up 6 bps at

2.20%. They were at 2.18% before the ECB decision.

Their premium over 10-year debt was at 7 bps,

up slightly from 6.8 bps before the central bank's statement. It

hit 2.6 bps on Wednesday, its narrowest reading since November

2022.

Italian 10-year yields, which on Wednesday fell

to their lowest level since August 2022, were up 0.5 bps at

3.54%, leaving their premium over Bunds at 140 bps.

They were at 3.53% before the ECB's statement, with the

premium over Bunds at 140 bps.