5Y5Y inflation expectations far below ECB’s 2%-target

A year ago, when the 5Y5Y inflation swap dropped below 2.0%, Draghi drew market participants' attention to this medium-term inflation measure and made it clear that it is monitored at the ECB. The reversal of the slight upward trend following the announcement of its QE programme in January dissatisfies the ECB but the lower expectations are also related to the drop in the oil price and hawkish ECB members could argue that the inflation swap market is still suffering from a bit of poor summer liquidity, says Danske Bank in a research note.

A drop close to 1.60% in the 5Y5Y inflation-linked swap rate will imply a dovish stance from the ECB as it shows de-anchored inflation expectations, adds Danske Bank