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ECB: Traded Inflation Remains Comfortably Below September Projections

ECB
BundesbankCentral Bank NewsFixed Income BulletsCEEMEAEurozoneGermanyBulletGlobalEuropean Central BankForeign Exchange BulletsRegionMarkets

EUR traded inflation swaps have rebounded from yesterday’s lows following crude oil’s geopolitics-driven rally. However, 1- and 2-year ahead swaps remain comfortably below the ECB’s September macroeconomic projections for Q4 2025 and 2026. We think current inflation swap levels are too low given the risks of weaker-than-expected Eurozone productivity growth over the next few years.

  • 2-year ahead inflation (ex-tobacco) is currently priced at 1.68%, below the ECB’s 1.9% Q4 2026 headline inflation forecast.
  • The swap reached its lowest level since July 2021 yesterday at 1.50% following the September Eurozone flash inflation data.
  • Although the sluggish Eurozone growth outlook should weigh on demand-side inflationary pressures, the dynamics of wage and productivity growth are key to developments on the supply-side.
  • The ECB expects Q4 2026 compensation per employee growth at 3.0% Y/Y, which will be consistent with the 2% inflation target only if productivity growth meets forecasts of 1.0%. The recent anaemic trends in productivity growth adds uncertainty to this expectation.
  • The 5y5y inflation swap has seen smaller intraday moves in the last few sessions compared to shorter-horizon counterparts, and remains ~5bps above the cycle lows seen in mid-September (last 2.1020%).
  • Note: EUR traded inflation swaps can be less liquid than conventional counterparts, which potentially exacerbates some intraday moves.
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EUR traded inflation swaps have rebounded from yesterday’s lows following crude oil’s geopolitics-driven rally. However, 1- and 2-year ahead swaps remain comfortably below the ECB’s September macroeconomic projections for Q4 2025 and 2026. We think current inflation swap levels are too low given the risks of weaker-than-expected Eurozone productivity growth over the next few years.

  • 2-year ahead inflation (ex-tobacco) is currently priced at 1.68%, below the ECB’s 1.9% Q4 2026 headline inflation forecast.
  • The swap reached its lowest level since July 2021 yesterday at 1.50% following the September Eurozone flash inflation data.
  • Although the sluggish Eurozone growth outlook should weigh on demand-side inflationary pressures, the dynamics of wage and productivity growth are key to developments on the supply-side.
  • The ECB expects Q4 2026 compensation per employee growth at 3.0% Y/Y, which will be consistent with the 2% inflation target only if productivity growth meets forecasts of 1.0%. The recent anaemic trends in productivity growth adds uncertainty to this expectation.
  • The 5y5y inflation swap has seen smaller intraday moves in the last few sessions compared to shorter-horizon counterparts, and remains ~5bps above the cycle lows seen in mid-September (last 2.1020%).
  • Note: EUR traded inflation swaps can be less liquid than conventional counterparts, which potentially exacerbates some intraday moves.