In Depth

ECB Monetary Policy Confronts Aging Demographics and Elusive Inflation

As the European Central Bank (ECB) embarks upon normalising its unconventional monetary policy, it is pertinent to consider whether Europe risks sliding into a liquidity trap.

  • As the European Central Bank (ECB) embarks upon normalising its unconventional monetary policy, it is pertinent to consider whether Europe risks sliding into a liquidity trap.
  • To assess this risk and its implications, we examine the evolution of inflation expectations in the eurozone and the linkages between demography and inflation. We review the policy instruments the ECB has at its disposal, whether they are likely to be effective in boosting inflation toward the ECB’s target of “below, but close to, 2%,” and what the investment implications are.
  • Our tentative conclusion is that demographic trends will continue to exert secular, downward pressure on eurozone inflation. We see a non-trivial risk inflation expectations gradually dislodge to levels below 2% over the coming decade and that the ECB enters the next recession without ever having normalised its policy stance.

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The Author

Konstantin Veit

Portfolio Manager, European Rates

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