Monday 20 November 2017

Traders eye inflation return on back of ECB stimulus

European Central Bank HQ in Frankfurt. Photo: Ralph Orlowski
European Central Bank HQ in Frankfurt. Photo: Ralph Orlowski

Ross Larsen

Signs that bond traders are becoming more confident that the European Central Bank's unprecedented stimulus will boost inflation are gathering as derivatives which protect against deflation dropped to a 17-month low.

Even after euro-area price growth declined last month more than economists forecast, traders are betting on a rebound.

Investors are now paying the least since December 2014 to protect against deflation over 10 years. This has been helped by Brent crude oil futures climbing to the highest level in almost six months last week. Speaking after officials maintained stimulus measures at last month's policy meeting, ECB President Mario Draghi said he expected inflation to accelerate in the second half of 2016.

The ECB's goal for price growth is just below 2pc policy makers have cut interest rates and expanded the asset-purchase programme in an effort to revive economic growth and avert deflation. While market indicators rise, Draghi will have to keep options for more stimulus open to ensure expectations stay anchored, according to Hendrik Lodde, a fixed-income strategist at DZ Bank. "We expect slowly rising inflation rates in the second part of 2016," Frankfurt-based Mr Lodde said.

"The base effect of the oil price reduction will start to end in September.

"The market is not pricing in a rapid return of inflation to the ECB's target rate. The central bank will probably try to pull out all the verbal stops in the coming weeks to raise inflation expectations."

The cost of a derivative that pays out should the price of a basket of goods cost less in a decade than it does today has fallen to 27 basis points. (Bloomberg)

Irish Independent

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