It is notable that this market reaction reflects the expectation that central banks are reacting to the short-term effects of exchange rates on inflation, since the empirical evidence suggests that these short-term effects are outweighed over time by the disinflationary spillovers of the Federal Reserve’s tightening. 25.
ECB staff analysis, based on a sensitivity exercise of longer-term market-based measures of inflation compensation to larger versus smaller monetary policy shocks, suggests that, unlike in the United States, in the euro area larger monetary policy surprises do not significantly lower five-year forward five-year ahead inflation-linked swap (ILS) rates compared with smaller policy surprises. 26.