This study evaluates how financial markets perceive the European Central Bank's response to inflation. To this end, it estimates the relationship between market interest rates and deviations of inflation from the policy target (forward-looking Taylor rules), taking into account the state of the economic cycle.
Since 2022, markets have anticipated a stronger responsiveness from the European Central Bank to inflation deviations from the target. The perception of a more aggressive central bank response has led to a greater anchoring of inflation expectations, thereby contributing to the effectiveness and credibility of monetary policy.
