Potential growth important for Euro area bond yields

Bond yields have been driven by ECB flows in 2015 and it seems evident that fundamentals have had a limited effect in market developments so far. However, with an expected sharp rise in inflation in Q4 and very low potential GDP growth in the euro area, focus could soon turn to whether the ECB could start tightening its monetary policy sooner rather than later. 

Analysts show that potential GDP growth is crucial for where long-term interest rates should be, when the ECB will start normalising its monetary policy and thus when bond yields should be driven by fundamentals rather than flows. 

Danske Bank expects potential growth to increase very slowly due to the very muted productivity growth, headwind from employment growth and modest investment outlook.