Gauging the impact of COVID-19 on market-based inflation expectations

Dirk Broeders, Gavin Goy, Annelie Petersen, Nander de Vette

Research output: Non-textual formWeb publication/siteProfessional

Abstract

Inflation-linked financial instruments are widely used to infer market-based inflation expectations and inflation risk. Following the outbreak of COVID-19 and an unprecedented oil price shock, the euro five-year, five-year inflation-linked swap is currently hovering around an all-time low of just below 1%. This column shows that around 60% of the drop the swap rate since 2015 can be attributed to the inflation risk premium, while the inflation expectations component explains the remaining 40%. In addition, inflation option prices reveal that the distribution surrounding inflation expectations has shifted to the left since January 2020, suggesting that markets expect the outbreak of COVID-19 to be a persistent disinflationary shock
Original languageEnglish
PublisherVoxEU.org eBook
Media of outputOnline
Publication statusPublished - 2020

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