09 October 2025
In Europe’s macroeconomic landscape, few things matter more than inflation expectations. When markets trust that inflation will stay near target over the long run, central banks gain flexibility to act. If that trust falters, even well-intended policies can lose their bite. In “Stay the Course: Navigating Euro Inflation,” Lison Christiaens examines a decade-plus of data to assess whether the European Central Bank (ECB) has maintained credibility through periods of turmoil.
Inflation Anchoring Through Crises
The ECB’s primary mandate is to keep inflation at 2% over the medium term. After surging to over 10% in October 2022, European inflation gradually eased but hovered around 2.5% by mid-2024 — still slightly above target. That raises the question: have investors begun to doubt the ECB’s ability to anchor inflation expectations?
Christiaens investigates this using inflation-linked swap rates (ILS) from 2013 to 2024, spanning both prolonged low‑inflation regimes before COVID and the post‑pandemic spikes. She analyzes responses to different types of monetary policy shocks: central bank interest rate decisions, forward guidance, quantitative easing (QE), and changes to policy timing.
Importantly, she distinguishes Odyssean shocks (future policy commitments) from Delphic shocks (signals about economic outlook), allowing a clearer view of how expectations shift. Misinterpreted forward guidance, Christiaens argues, can become destabilizing — if markets treat tone as a signal of underlying economic weakness rather than a policy path.
Key Findings: Stability Amid Volatility
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Anchoring holds in the long run. Even during episodes of extreme inflation volatility, five- to ten-year inflation expectations in the euro area remained broadly stable — evidence that markets continue to trust the ECB’s 2% anchor.
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Rate hikes and QE have predictable effects. Standard interest rate moves and QE tend to push down near-term inflation expectations, consistent with macro theory. However, forward guidance and timing signals display more ambiguous effects, at times triggering counterintuitive reactions.
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Forward guidance is a double-edged sword. If poorly calibrated, it can shift from a stabilizing tool to a trigger of Delphic shocks, confusing markets about growth outlooks versus policy intent.
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Short-term responses are muted, with delay. Inflation expectations tend to adjust 10–15 days after policy shocks, reflecting the lower liquidity and slower transmission in the ILS market.
What It Means for Investors & Policymakers
For financial professionals, the message is reassuring: long-term inflation expectations remain in check, suggesting that markets still believe in the ECB’s commitment to price stability. That provides room for tactical moves without risking credibility.
Still, the analysis underscores caution around communication strategy. Because the impact of forward guidance can be misinterpreted, central banks should design messages carefully to avoid destabilizing expectations. A misstep in tone or timing could backfire.
Given the anchoring seen in longer-dated ILS rates, investors may find greater confidence in long-term inflation-linked instruments. At the same time, short-term inflation surprises should be met with measured reactions — they don’t necessarily herald lasting de-anchoring.
For CFA Society Italy members and European market participants, the study reinforces a core principle of monetary policy: credibility matters more than immediate swings. The real test lies not in reacting to every headline number, but in maintaining strategic calm through volatility.