And lower inflation expectations directly lower the equilibrium nominal interest rate, requiring a lower interest rate to create monetary stimulus. Thanks to our measures, inflation expectations have remained anchored. According to the ECB’s latest survey of professional forecasters, expected inflation at a five-year horizon is 1.8%.
The current techniques are typically based on market prices, making them vulnerable to a change in investor sentiment. To mitigate the problem, the market has to enhance valuation processes, in particular by finding ways to improve the quality of inputs to their valuation models, even in the event that market data are not available. Credible valuation techniques are fundamental for maintaining trust among counterparties.