(Bloomberg) -- To judge European Central Bank President Mario Draghi’s success at one of his most challenging meetings of the year, look at inflation expectations.
The five-year forward, five-year inflation swap rate -- a gauge of how much traders expect prices to rise in the coming years -- touched 1.21% this week. That’s the lowest level since 2016 and well below the ECB’s target of just under 2%. For Draghi to boost the rate, he may need to drop a hint for more quantitative easing to come or alter the bank’s forward guidance.
Investors in Italy’s bonds will also be parsing the ECB’s message minutely. The yield on the nation’s two-year bonds has declined 20 basis points this month, partly on expectations that the ECB will confirm the terms of a new round of cheap loans to lenders, which would boost the region’s third-biggest economy.
“Inflation expectations are basically de-anchored now,” said Arne Lohmann Rasmussen, head of fixed income research at Danske Bank A/S. “We see a clear risk that the market will be disappointed if he does not open the door wide enough for new stimulus.”
Danske said that the ECB may either give clues that a fresh round of quantitative easing could be round the corner, or change the forward guidance to include the possibility of rate hikes. It currently says: