June 6, 2019 / 3:49 PM / 4 months ago

Euro zone inflation expectations slump to record low after ECB damp squib

LONDON (Reuters) - A key market gauge of long-term euro zone inflation expectations collapsed to an all-time low on Thursday, as European Central Bank policy action failed to lift confidence that the bloc’s near-2% inflation target could be met any time soon.

The ECB earlier said it was pushing back the timing of its first post-crisis interest rate hike again and said it would continue paying banks for lending in its latest effort to revive a slowing euro zone economy.

At a news conference, ECB chief Mario Draghi said that there was no threat of inflation expectations becoming “de-anchored.”

But this failed to reassure investors and the slide in market-based inflation expectations resumed shortly afterwards.

The five-year, five-year breakeven forward, which measures expected inflation over a five-year period that begins five years from today, fell to 1.2414%.

That took it below a previous record low set in 2016 when deflation fears gripped the currency bloc. The ECB had responded at the time with rate cuts and ramping up its massive asset purchase programme.

But at its latest meeting it refrained from mentioning any possibility of cutting rates and its cheap loans programme for banks was less generous than expected.

“People expected a lot more bold action from the ECB at this stage and now they don’t believe they are able to achieve the convergence (of inflation) just with the measures announced today,” said Commerzbank rates strategist Christoph Rieger.

For a graphic on Euro zone inflation expectations hit record low after ECB damp squib, click tmsnrt.rs/2WVRGag

The ECB targets an inflation rate of just below 2%, but it has undershot this since 2013.

The key market inflation measure, tracked by the ECB, has fallen 32 basis points since the start of 2019, but a year ago it stood at 1.75%.

“The bottom line is there is no inflation,” Andrea Iannelli, investment director at Fidelity, said.

“The ongoing ‘miss’ of the ECB is something that has become more or less the norm,” Iannelli said.

Inflation in euro zone powerhouse Germany eased sharply last month for a price growth of 1.3% annualised the lowest since February 2018. In May 2018, German inflation had exceeded the ECB target at 2.2%.

But this year, the ECB’s forecasts prices to rise 1.3%, 1.4% next year and 1.6% in 2021.

Some economists said caution was warranted when looking at the market-based inflation gauges, which tend to be dragged down by the general flight into safe-assets during times of uncertainty.

“It’s something the market looks at now it but at the moment it is out of sync with other indicators,” said David Owen, chief European financial economist at Jefferies.

For a graphic on German inflation, click tmsnrt.rs/2WSvUDW

Reporting by Dhara Ranasinghe, additional reporting by Abhinav Ramnarayan, Sujata Rao and Helen Reid; editing by xxx

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