Inflation worries boost interest rate expectations

The recent combination of rising inflation, hawkish signals from the ECB and some fall in interbank interest rates has led the markets to price back in a significant chance of a final rise in interest rates to 4.25%. (See Chart.) But with activity indicators pointing to a slowdown in GDP growth, core inflation, so far, holding steady at 1.9% and credit concerns remaining, we still expect the next move in interest rates to be downward.