After the acute intensification of the crisis (and following the reduction of the ECB’s policy rates in October 2008), nominal yields at two and three-year maturities fell in the euro area, as shown in Figure 1. This partly reflected private expectations that the cut in policy rates would prove persistent.
At the same time, as revealed by the developments in break-even rates illustrated in Figure 2, private expectations regarding euro area inflation remained correctly anchored, even at these relatively short horizons. By implication, real rates at such maturities fell substantially, as shown in Figure 3.