MNI POLICY: Public Better Forecasters Than Markets: ECB Coeure

By Luke Heighton

     FRANKFURT (MNI) - Household inflation expectations may be better predictors

of future inflation outcomes than those of professional inflation forecasters,

including those of financial markets, the European Central Bank's head of Market

Operations said Thursday.

     There is "tentative evidence suggesting that household inflation

expectations are better predictors of future inflation outcomes," Benoit Coeure

said, as euro area consumers "become less likely to expect inflation outcomes

that would be inconsistent with the ECB's definition of price stability." 

     Here are the key points from the speech in Frankfurt:

     - Developments over the past year indicate that a growing gap has emerged

between the inflation expectations of market participants on one side, and those

of households and professional forecasters on the other, Coeure said.

     - Market-based inflation expectations are much more in line with

survey-based inflation expectations once one corrects for the inflation risk

premium, ECB staff analysis suggests.

     - Around 80% of the drop in the five-year forward inflation-linked swap

rate five years ahead, both since the start of 2014 and in 2019, is due to a

drop in the risk premium. Expectations about the baseline have fallen to a

smaller extent.

     - But shifts in risk premia explain much less of the recent fall in short

and medium-term expectations, with swap rates since the autumn of last year

reflecting a genuine fall in inflation expectations.

     - Households may not exhibit a clear grasp of the level of inflation at any

given moment, but they do have "a fairly good understanding of changes in the

trend of current inflation."

     - Households' inflation expectations "have remained more stable since the

start of the year, and today remain close to a six-year high," Coeure said.

Moreover, there is "a discernible positive relationship between households'

reported willingness to spend and the change they expect in inflation."

     - By contrast, the high frequency of their revisions "probably makes

market-based inflation expectations a less reliable and useful yardstick for

social partners, firms and households in wage and price-setting, and hence a

less reliable predictor of future inflation."

     - Therefore, while policymakers "should never ignore signals coming from

financial markets," Coeure said, "they should not focus on them too narrowly

either. The pessimism priced into bond markets today may not necessarily presage

downward pressure on inflation tomorrow -- at least not to the same extent."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

[TOPICS: M$X$$$,M$$EC$]