By Dhara Ranasinghe
LONDON, July 11 (Reuters) - Short-dated German bond yields fell on Monday to within striking distance of record lows hit after last month's Brexit vote, which has stoked concerns about a weaker outlook for growth and inflation that could encourage the ECB to act soon.
The yield on two-year German government bonds fell to minus 0.70 percent, its lowest level since it hit a record low the day after the June 23 referendum in which Britain voted in favour of leaving the European Union.
Brexit has sent ripple waves across the world -- unleashing uncertainty, darkening the outlook for the world economy and raising expectations for central banks to deliver more monetary stimulus.
"Even though I disagree with the market pricing, it's clear investors are expecting more ECB action with Brexit likely to have a negative impact on the economy," said Cyril Regnat, fixed income strategist at Natixis.
On Friday, the International Monetary Fund cut its euro zone growth outlook for the next two years on uncertainties sparked by Brexit. The IMF now expects the bloc to grow 1.6 percent in 2016, down from a previous forecast of 1.7 percent.
Inflation expectations have fallen sharply -- piling pressure on the European Central Bank to deliver more monetary stimulus to achieve its inflation target of close to 2 percent.
The five-year, five-year breakeven forward rate, the ECB's favoured gauge of market inflation expectations, is trading near record lows just under 1.26 percent, down from around 1.40 percent just before Brexit and well below the ECB's target.
Money markets in the past two weeks have moved to price in a greater chance of a further cut to the ECB's minus 0.40 percent deposit rate, with a 10 basis point cut priced in by October .
Two-year German bond yields are trading some 30 bps below the ECB's deposit rate in a another sign that investors are positioning for further monetary easing.
Regnat at Natixis said he did not expect the ECB to cut its deposit rate further given the negative impact of sub-zero interest rates on the banking sector. Instead, he expected the ECB to extend its quantitative easing programme beyond the current end date of March 2017.
The Bank of England meets on Thursday amid heightened talk that it could deliver more stimulus to shore up the British economy in the wake of Brexit.
Any policy action from Britain's central bank could stoke expectations of further ECB easing.
For Reuters new 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 Dhara Ranasinghe; Editing by Keith Weir)