STORY CONTINUES BELOW THESE SALTWIRE VIDEOSLONDON - European Central Bank officials seem irked that they are not being taken seriously by markets - risking a show of force in Frankfurt that may seem at odds with a struggling euro economy.
But with inflation still more than twice the target, and long-term market expectations - like those in the U.S. - settling in on a 2.5% landing zone rather than the stated 2% goal, some officials fear ECB credibility is being challenged and that may infect price setting in the wider economy. Specifically, she outlined puzzlement at why the inflation-adjusted risk-free rates priced by markets - real Overnight Index Swap yields from one to 10 years - had subsided again since the last ECB rate hike in July - back to where they were in February when ECB policy rates were just 2.5%.
Given the lags in how policy rates hit the economy - due mainly to delays with which fixed-rate loans like mortgages are refinanced at the new higher rates - central banks risk overshoot and overkill if they keep tightening until their actual target is reached. Long-term real yields from benchmark German government bond markets are positive again this year for the first time in almost a decade. But they have fallen almost 20bp from just before the last ECB rate hike to just above 0.1% now.
But although well off early August highs of around 2.7%, market inflation expectations contained in the euro 5-year, 5-year forward inflation swap remain stuck at 2.5% - up more than 10bp from the start of the year despite 125bp of ECB hikes.