Just a few days to the commencement of the European Central Bank’s meeting in which it is widely expected to roll out quantitative easing measures; financial markets remained indifferent to the prospect of inflation touching the targeted rate over the next 10 years.
The ECB is projected to begin a money-printing spree that will see billions of euros pumped into the financial system as it buys government bonds in order to increase inflation. Despite this, various measures have failed to live up to expectations.
This was mostly due to the falling crude prices since June, which have affected the cost of various goods and services and caught markets off-guard.
However, the puzzling fact is that inflation estimates in the euro area have decline at a similar pace as that in various countries such as the USA; where the Federal Reserve is due to introduce tighter monetary policy in 2015.
This has led a certain segment of the market to start doubting whether quantitative easing can be an effective tool, besides doubting the credibility of the ECB.
“You can forget getting break evens back to where the ECB wants them to be,” Ralf Preusser, the head of EMEA rates research at BofA Merrill Lynch, told Reuters. “You’ve got to price some probability that it won’t work. It is a rational market reaction to the fact that all central banks have failed to hit their inflation targets over the past four-five years. The market doesn’t believe that QE is the miracle cure. It can only be part of the solution.”
The euro 5-year, 5-year break even forward, which is used to measure the long-term inflation sentiment of the market, has declined 60 basis points over the last six months. The forward, which gauges how investors and market participants foresee 2025 inflation projections to stand in 2020, is trading at a record low of 1.50 percent. This is far less than the ECB’s approximately 2 percent goal. To register for a free 2-week subscription to ForexMinute Premium Plan, visit www.forexminute.com/newsletter.
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