Euro zone inflation gauge tracked by ECB hits lowest since 2016

LONDON (Reuters) - A key gauge of the market's long-term expectations for inflation in the euro area fell on Tuesday to its lowest level since late 2016, in a further sign that weak economic data globally is weighing on the inflation outlook.

The euro zone economy has performed worse than expected in recent months and global uncertainty is weighing on economic sentiment, European Central Bank President Mario Draghi said on Monday, repeating the bank's recent warnings about growth.

Highlighting investor concern that the ECB will struggle to achieve its near 2 percent inflation target, inflation expectations in the bloc have fallen sharply since early November.

The five-year, five-year breakeven forward, a market gauge tracked closely by the ECB, fell to 1.5059 percent on Tuesday.

That is its lowest level since October 2016: the year the ECB expanded its bond-buying stimulus scheme to stave off the threat of deflation in the currency bloc.

The five-year, five-year breakeven forward measures expected inflation over a five-year period that begins five years from today.

While the gauge remains well above lows of around 1.25 percent hit in 2016, it is also well below the ECB's inflation target and peaks near 1.8 percent hit a year ago.

(Graphic: Key euro zone i
nflation gauge drops to lowest since 2016 link:

"The likelihood of inflationary pressures turning towards the ECB's target of below or close to 2 are still far fetched, said Florian Hense, European economist at Berenberg in London.

"For the ECB in a normal scenario, that would mean increasing its monetary accommodation stance rather than keeping it stable as it is now."

The ECB ended quantitative easing last month and has said a pick-up in wage pressure is likely to boost inflation in the coming months.

But a deteriorating economic backdrop and concerns about fallout from Brexit and global trade tensions has knocked both inflation and economic growth expectations, in turn prompting markets to push out bets on a ECB rate rise further into the future.

Some analysts point out that the drop in the five-year, five-year breakeven forward towards 1.5 percent compares with an average and relatively stable 1.7 percent through 2018.

"One should not expect inflation to pick up too early," said Matthias Weber, assistant professor of finance at the University of St.Gallen. "We've seen how hard it is for the ECB to achieve its inflation target."

(Reporting by Dhara Ranasinghe; editing by John Stonestreet)

By Dhara Ranasinghe