If the inflation risk premium averages 50 basis points, for example, then breakeven inflation will overstate the market’s true expectation of inflation by half a percentage point, a substantial amount. A further complication is that inflation risk premiums are not constant but instead appear to vary over time as economic circumstances change.
the rate of return investors expect from an investment in bank equity) is a useful benchmark. In addition, survey-based information on banks’ own estimates of long-term sustainable ROE can complement approximations of what could be sustainable levels of profitability. Combining estimates from these different approaches, we arrive at a target range of 8-10% ROE for euro area banks.