(Bloomberg) -- It may be time for the European Central Bank to start worrying about whether investors are betting it can reach its inflation goal.
For the past year, declines in a key metric of market-based inflation expectations -- 5-year 5-year inflation forwards -- were driven mostly by the falling global risk premium, according to Frederik Ducrozet, global strategist at Banque Pictet & Cie in Geneva. ECB President Mario Draghi made a similar argument in his most recent press conference.
Yet Ducrozet notes the drop in market pricing in more recent weeks and months has increasingly been attributable to actual concerns over the inflation outlook.
His breakdown, which is based on models used in a 2017 ECB working paper, show that actual inflation expectations have made up over 30% of the drop in the forwards pricing this year, up from less than 15% in the past year.
“Over the more recent period, inflation expectations appear to have been dragged lower by idiosyncratic factors, raising legitimate concerns for the ECB,” Ducrozet wrote in a note on Monday. “Other measures of expectations have remained more resilient, underpinning the ECB’s cautiously optimistic stance for now. But, even survey-based metrics now point to a modest, albeit worrying shift in the distribution of inflation expectations.”
For ECB policy makers, holding inflation expectations anchored is key to maintaining credibility, as they aim to keep price growth below but close to 2% over the medium term. Ducrozet expects the ECB would restart its bond-purchase program -- halted at the end of last year -- in the case of significant further de-anchoring of inflation expectations.