巴黎银行-欧洲-宏观策略-欧元区通胀目标不断变化-20190722-7页_1mb

G10 Interest Rates Summary: Eurozone Inflation Target Shift

Core Content

This document discusses the potential shift in the European Central Bank's (ECB) inflation target and its implications for market expectations and policy. The ECB is under increasing pressure to redefine its inflation objective, moving from the current "below, but close to, 2%" to a precise numerical target, likely 2.0%. This shift is driven by the need to address persistently low inflation and to better anchor inflation expectations.

Main Views

• Inflation Target Reform: The ECB may adopt a specific inflation target (e.g., 2.0%) to improve clarity and effectiveness in its monetary policy. This would signal a more proactive approach to stimulate inflation and align expectations with actual outcomes.

• Market Reaction: The initial market response to the possibility of a strategy review was positive, as evidenced by the rise in the 5y5y inflation breakeven curve by around 7 basis points (bps). This suggests that the market still trusts the ECB's ability to manage inflation expectations.

• Policy Implications: A precise numerical target could compel the ECB to implement more accommodative policies, potentially leading to higher long-end inflation expectations. This would have significant implications for bond markets and inflation-linked instruments.

• Inflation Expectations vs. Reality: According to ECB board member Benoit Cœuré, household inflation expectations are a better predictor of actual inflation than financial market expectations, due to their link with consumer spending. The relationship between actual inflation and expectations has weakened since 2015, indicating a structural break in inflation dynamics.

• Inflation Flattener Position: The document notes that the author previously held an inflation flattener position in March, based on the view that long-dated inflation swap forwards were overvalued. However, the current position is neutral due to the flattening of the inflation breakeven curve and the potential for further policy stimulus.

Key Information

• Current Inflation Target: "Below, but close to, 2%".
• Proposed Change: A precise numerical target, likely 2.0%.
• Market Impact: The shift could lead to increased monetary stimulus and higher inflation expectations.
• Evidence of Structural Shift: The 50-basis point downward shift in the relationship between inflation expectations and realized inflation since 2015 suggests a structural change in inflation dynamics.
• Profit from Trade: The inflation flattener trade has generated a profit of 12.5bps.

Market View

The document presents a market view that has evolved from a bearish stance to a neutral position. The rationale is based on the flattening of the inflation breakeven curve and the anticipated policy response to a more defined inflation target.

Legal and Regulatory Disclosures

• The document is a marketing communication and not investment research.
• It contains non-independent research and is intended for professional clients and eligible counterparties.
• BNPP may have conflicts of interest due to its involvement in various financial activities.
• The information is not intended to be used by non-qualified investors and may include performance data based on back-testing.
• The report is subject to legal restrictions in various jurisdictions, including the U.S., UK, France, Germany, Belgium, Ireland, Netherlands, Portugal, Spain, and Switzerland.

Conclusion

The ECB's potential shift to a precise inflation target could have significant implications for monetary policy and market expectations. The document outlines the rationale for such a change and its possible effects on inflation-linked instruments, while also emphasizing the legal and regulatory context in which the report is presented.