Private sector inflation expectations are an important factor in monetary policy decisions. Central banks that pursue an inflation target monitor their evolution to get timely feedback on how their actions are assessed by markets. Thus, it is interesting to see how eurozone inflation expectations changed following the recent ECB pivot towards tighter policy that culminated with the announcement that rates will be increased at the next Governing Council meeting on 21 July.
The most reliable reference for market expectations for eurozone inflation is that derived from the inflation swaps market.1 Chart 1 shows that since the early 2000s to the outbreak of the pandemic, inflation expectations declined. In 2014, medium to long term expectations fell below the ECB’s 2% target, a shift that convinced the ECB to restart and broaden its bond-buying program.