LONDON, Nov 26 (Reuters) - A key gauge of the market's long-term euro zone inflation expectations fell below 2% for the first time since July 2022 on Tuesday, a sign investors think faltering growth means inflation could undershoot the European Central Bank's target.
The five-year, five-year forward inflation swap fell to 1.9994%, LSEG data showed, a relatively sharp fall from above 2.2% in October.
The swap reflects investors' expectations for inflation for the five-year period that begins in five years' time.
WHY IS IT IMPORTANT
Central bankers are highly attuned to the inflation expectations of investors, households and companies. Many economists believe inflation expectations can become a self-fulfilling prophecy, as consumers increase spending now to avoid higher prices in the future, or vice versa.
Former ECB President Mario Draghi in 2014 cited, opens new tab a five-year-five-year inflation swap, which was then just below 2%, as a worrying sign for the central bank. In the years before 2022, the ECB saw deflation as a major risk.
And the latest fall will likely cement expectations for ECB rate cuts.
CONTEXT
Euro zone inflation has fallen from a record high of 10.6% in October 2022 to 1.7% in September this year, before rising to 2% in October. November numbers are released on Friday.
Analysts say a normalisation of snarled-up supply chains after COVID, a fall in energy prices after the Ukraine war, and central bank rate hikes have helped cool price growth.
Survey data on Friday showed euro zone business activity fell much more sharply in November than economists had expected, intensifying concerns about low growth in the bloc.
The ECB's chief economist Philip Lane on Monday said inflation could fall below target if growth remains weak.
"Monetary policy should not remain restrictive for too long," French newspaper Les Echos quoted Lane as saying. "Otherwise, the economy will not grow sufficiently and inflation will, I believe, fall below the target."
Reporting by Harry Robertson; editing by Dhara Ranasinghe