Whatever It Takes Part 2

Good for the Market (at least for a while).
Not Enough for the Real Economy.

MACROECONOMICS Whatever It Takes Part 2

31 Oct 2014

A couple of Draghi’s appearances - Jackson Hole (August 22nd) and September ECB meeting (September 4th) – have clearly shown that the ECB is shifting gear once again. Trying to look beyond all the technicalities involved in the new T-LTRO and the ABS and Covered Bonds purchase programmes (a.k.a. “private” QE), I think it is worth focusing on the bigger picture and acknowledging that two new aspects have emerged in the “ECB thinking”.

Declining inflation

After repeating for months that declining inflation was (only) a potential problem that needed to be kept monitored and that the main causes (energy and food soft prices in addition to the strengthening euro) were likely to be temporary, the ECB is now really worried that medium to long term inflation expectations are becoming disanchored. Their preferred measure for those expectations is the 5 year inflation swap 5 year forward. It has dropped below 2% in August, has tried to bounce with the new Draghi determination but it is now again languishing on the lows.

MACROECONOMICS Whatever It Takes Part 2 5y inflationswap