What drives low market-based inflation measures? A TECHNICAL DECOMPOSITION OF THE INFLATION-LINKED SWAP RATE

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

Research output: Contribution to journalArticleProfessional


Central banks and investors critically monitor market-based inflation measures as key indicators for medium-term inflation expectations. Market-based measures of inflation expectations have experienced a sharp decline over 2019. The euro 5y5y
inflation-linked swap rate has fallen from 1.8 percent at the beginning of 2019 to a level of around 1.2 percent at year’s end. This sharp decline raises the question what drives the low market-based inflation measures. We show that a large part of this decline is likely to be attributed to a fall in the inflation risk premium. This implies that nominal bonds are no longer an ‘inflation bet’ but rather a ‘deflation hedge
Original languageEnglish
Pages (from-to)14-18
JournalVba Journaal
Issue number141
Publication statusPublished - 2020

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