ECB under pressure from falling inflation expectations

The 5Y 5Y forward swap rate of inflation (or 5Y 5Y inflation) has fallen significantly in recent weeks. The 5Y 5Y inflation rate is a financial measure often referred to by the ECB, as the central bank considers it important there is confidence inflation will eventually return to the inflation target of 2.0%. As the market is not really confident about that at the moment, close eye will be kept on ECB communication over the next couple of weeks (next meeting scheduled for 3 September).

The question is whether the current situation is serious enough for the ECB to announce further policy easing. This could take the form of further rate cuts, though an expansion of the QE programme is probably more likely. The programme could be extended beyond September 2016, or the monthly volume of buybacks could be upped.

"Remember that across the pond the economy only began to right itself after three QE programmes. However, we do not expect the ECB to take further steps right now, nor does the market particularly seem to expect more easing at this point, in our view", says Danske Bank.