Mario Draghi's dramatic Tuesday hints of further monetary easing by the Eur...
LONDON - Mario Draghi’s dramatic Tuesday hints of further monetary easing by the European Central Bank has stabilized collapsing euro zone inflation expectations, but the departing ECB chief will struggle to calm market fears of Japan-style economic stagnation.
Having slid since the June 6 ECB meeting to almost half the ECB’s medium-term target, a key long-term market inflation gauge - the five-year, five-year breakeven forward rate - posted its biggest ever one-day jump after Draghi spoke on Tuesday. “The five-year, five-year forward inflation rising is a sign that the ECB is regaining some credibility in achieving its goals. But action will have to follow,” said Benjamin Schroeder, senior rates strategist at ING in Amsterdam.A 10 bps ECB rate cut is now fully priced in by October, and another is anticipated in 2020. Commerzbank expects the ECB to move as early as July.
Part of the problem for central banks is that changes such as technology point to a structural shift lower in inflation. In addition, UniCredit Bank head of macro research Marco Valli estimates that price gauges from the real economy are currently in line with or above their long-term averages. That contrasts with the end of 2014 and early 2016 - when the ECB last ramped up quantitative easing.
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