Abstract
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
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 language | English |
|---|---|
| Pages (from-to) | 14-18 |
| Journal | Vba Journaal |
| Issue number | 141 |
| Publication status | Published - 2020 |