LONDON: Euro zone long-term inflation expectations fell to record lows on Thursday, fuelling bets on more monetary policy easing by the ECB and pegging core euro zone government bond yields near 10-month lows.
Sliding oil prices have helped drive inflation expectations lower and analysts say the fact they remain depressed even though oil prices show signs of recovering is a worrying sign.
The five-year, five-year euro zone breakeven forward , which is closely watched by the European Central Bank and measures where markets expect inflation forecasts for 2026 to be in 2021, hit a record low just below 1.40 percent.
It has fallen about 30 basis points since the start of the year as a fall in crude and concerns about China’s economy prompt investors to scale back inflation expectations.
One-year inflation swaps are at minus 0.12 percent, while 30-year inflation swaps are at 1.48 percent , suggesting expectations for inflation over a longer period also remain low.
Oil slipped more than 1 percent on Thursday, highlighting the uphill task the ECB faces in pulling inflation back towards its target of just below 2 percent. Inflation in the euro zone is running at 0.4 percent.
“We’re open minded to the view that the ECB could do more in March because the correlation between oil and inflation has weakened,” said Commerzbank strategist Rainer Guntermann.
“When oil falls, inflation expectations trend lower but on days where oil spikes up like yesterday, inflation expectations still trend lower and this could be worrying for the ECB as it suggests additional underlying factors may be at play.”
