The 5-year, 5-year euro inflation swap rate, a closely followed indicator of longer-term inflation expectations, has dropped to 1.23%, its lowest level on record. This means this inflation measure has fallen below the levels last seen in 2016, when the ECB was in full ‘QE-mode’ to prevent inflation expectations from becoming unanchored.
Roughly EUR 1.5 trillion in balance sheet expansion further and we’re basically back to square one. Does this mean the ECB will embark on another round of monetary stimulus? Bond markets certainly seem to think so, with German 10-Year bond yields already at new all-time lows. But because the ECB has been unable to reduce any of its extraordinary measures in recent years, the room for further easing is less than it was before, contrary to what the ECB wants to let us believe.
