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As the ECB meets in Naples today, Draghi faces tough opposition from German hawks regarding broadening monetary stimulus. While weakening European data and low spot inflation will support Draghi’s arguments, his prime weapon is the attached chart. It shows inflation expectations in Europe as expressed in the ECB’s preferred measure, breakeven inflation five year five year forward (bei5y5yf). Draghi highlighted this measure in Jackson Hole on August 22, as it had declined to 1.95%, i.e. on the threshold to the ECB’s target (close but below 2%). At the September 4 meeting, Draghi concluded that the bei5y5yf rate had risen following his Jackson Hole speech. Following the September meeting, however, bei5y5yf has fallen below the August 22 trough and is now only marginally above 1.9%. We expect this to draw some attention at the press conference as it is now unclear whether medium-term inflation expectations remain well anchored (which has so far always been the ECB’s conclusion).
This is what Draghi said at the Sep 4 press conference (Q&A): What happened in August is that we’ve seen a worsening of the medium-term inflation outlook. We have seen a downward movement in all indicators of inflation expectations across all maturities. As I had a chance to say in Jackson Hole, one of the most used measures, the five year in five years inflation, had dropped by something like, I remember 18 basis points, just below 2%. So after the speech, some of these measures backed up. Some of them went back to their original level, but most of them did not.
Source: Macrobond and Bloomberg
ECB: Draghi ser högre investeringar som nyckeln till uthållig återhämtning. "Yet I think we would all agree that monetary policy alone cannot do the job of restoring confidence and returning the euro area to growth". Kommer det mer under ECB presskonferens idag kl 14:30?
ECB: Draghi vill bredda ABS-portföljen med skräpobligationer. Tyskarna inte glada.