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The EUR 5y5y inflation swap has fallen 5bps through October, currently hovering around 2.05%. This is the lowest since the start of June, a time when tariff-driven growth concerns dominated the outlook for near-term ECB policy. 

• Shorter-dated swaps have also moved further below the 2% target, with 1- and 2-year swaps currently tracking below the ECB’s 2026 headline inflation projection of 1.7% (caveating that swaps are priced on a HICP ex-tobacco basis).  
• There have been several drivers of the recent fall in market implied EUR inflation expectations:
  • A renewed pullback in Brent crude futures amid excess supply concerns and an uptick in US/China trade tensions.
  • Weak growth signals from the likes of Germany through October, increasing concerns that sequential GDP growth in Europe’s largest economy could be negative again in Q3. Note that Friday’s October flash PMIs will provide a more timely look at regional growth momentum (including the impact of recent US/China rhetoric).
  • An increasing likelihood of a delay to the EU’s ETS2 carbon pricing scheme.
• A delay to ETS2 beyond the current 2027 implementation date has been a well-known risk for some time (e.g. MNI Policy Team’s piece on September 17). Following a letter from member states last week, the EU’s Environmental Council could announce (or set the stage for) a delay to 2030 at today’s meeting (timing details here).

Source: Bloomberg Finance L.P.

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