Even before the coronavirus (COVID-19) pandemic, inflation across many advanced economies had been falling short of central banks’ aims for nearly a decade. In the euro area, hopes that inflation would sustainably recover to levels closer to 2% have been repeatedly and persistently disappointed, despite highly favourable financing conditions.
Years of subdued price pressures have raised the spectre of low inflation becoming entrenched in people’s expectations. Considering that financial markets believe that real interest rates will remain in negative territory for the foreseeable future, private investors appear to harbour serious doubts about the capacity of the euro area economy to chart a sustainable path towards higher nominal growth.