ECB’s Limits Highlighted by Index Signaling Return to Deflation

A gauge measuring traders’ euro-zone inflation expectations over the next year sank below zero for the first time since March as oil prices fell and an economic slowdown in China prompted a rout in stocks.

With Brent crude oil below $45 a barrel for the first time since 2009, traders see consumer prices falling 0.046 percent over the next 12 months, data compiled by Bloomberg show. That’s the most pessimistic outlook since February, the month before the European Central Bank started its quantitative-easing program to stave off deflation.

“Given the downward momentum in energy, China and stocks, it’s very likely that short-term inflation expectations will fall further,” said Jorge Garayo, a fixed-income strategist at Societe Generale SA in London. “The ECB’s likely to sound increasingly worried about the implications to inflation expectations, and will probably want to send dovish signals at their next meeting.”

The reading on the one-year inflation swap rate compares with a 2015 low of minus 0.79 percent in January.

A longer-term measure known as the five-year, five-year forward inflation swap rate dropped to 1.59 percent, the lowest closing price since February.

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