1、In March we entered an inflation flattener on our viewthat long-dated inflation swap forwards were too high inEurope given the weak growth outlook and marketscepticism regarding a rise in HICP inflation to theECBs“below,but close to,2%objective.We now turn neutral on the inflation breakeven curve in
2、light of the curves flattening since the trade wasentered in March and as a new inflation target wouldincrease pressure on the ECB to loosen policy further,which we would expect to drive up long-end inflationexpectations,at least initially.Close:5y5y/15y15y HICPxT flattener.Profit:12.5bp.MARKET ECON
3、OMICS|G10 INTEREST RATES KEY MESSAGESWe think it would make sense for the central bank toadopt an actual point for the inflation aim(presumably2.0%),given the ECBs concern about persistently lowinflation.We would expect a precise numerical objective,on themargin to compel the ECB to introduce more s
4、timulusand to improve the anchoring of inflation expectations.We have turned neutral on the inflation breakevencurve.FLASH|EUROZONE22 July 2019the 5y5y inflation breakeven rose by around 7bp onthe day of the report.All else being equal,we would expect a precisenumerical objective,on the margin to co
5、mpel the ECBtointroducemorestimulusandtoimprovetheanchoring of inflation expectations.The close relationship between the actual inflationrateandhouseholdsexpectations(accordingtoMr Cur,these have been a better predictor ofinflationthanfinancialmarketparticipantsexpectations via its link with consume
6、r spending)raises the risk of persistently low inflation.Note alsothe downward shift in the relationship since 2015,ofaround 50bp,which probably indicates a structuralbreak(as is alsoshown by other metrics forexample,using realised inflation and 5y5y vs 5yinflation swap differential).Agne Stengeryte
7、,Europe rates Strategist|BNP Paribas London BranchSpyros Andreopoulos,Senior European Economist|BNP Paribas SA Zweigniederlassung FrankfurtEurozone inflation Moving target1|FLASHECB board member Benoit Curs recent speech onhousehold inflation expectations highlights the ECBsconcern about persistentl
8、y low inflation,and last weekthere was a press report that ECB staff are reviewingthe inflation objective(the last review occurred in2003).Indeed,weseeECBgovernorMarioDraghiscomments on a symmetric inflation target as indicativeof a fundamental shift in thinking.And while anyofficialstrategyreviewwo
9、uldprobablynotbeconcluded under Mr Draghis tenure,it could be readyfortheGoverningCouncilsdecisionandannouncement early in Christine Lagardes tenure.The key point seems to be to move away from“below,but close to,2%”to an actual point for the inflation aim(presumably 2.0%).We think this makes sense f
10、orseveral reasons:The current formulation is ambiguous it is notalways clear when exactly inflation or the inflationprojection is in line with the objective;The precise formulation of the inflation objectivehas an impact on policy recently the GoverningCouncil spent some time debating whether inflat
11、ionforecasts were in line with the objective,ratherthan adjusting policy;andAprecisetargetwouldbemoreeffectiveinanchoring inflation expectations.The initial market reaction to the report of an ECBstrategy review suggests the ECB retains credibility Market viewFig.1:Consumer confidence in inflation v
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