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Inflation falling but rates may rise to zero

We expect consumption to rebound from the Omicron wave within a few weeks, lifting euro-zone GDP to its pre-pandemic level in the first half of the year. But GDP will remain below its pre-pandemic path for the foreseeable future. Meanwhile, more stable energy prices will cause headline inflation to come down sharply, but the lingering effects of the pandemic will prolong supply-chain problems and wage inflation is likely to rise. As a result core inflation will stay above the ECB’s 2% inflation target throughout 2022. And against that backdrop, the ECB will end its net asset purchases by December and prepare the ground to raise its deposit rate to zero by the end of 2023.
Andrew Kenningham Chief Europe Economist
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European Data Response

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European Data Response

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European Economics Weekly

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More from Andrew Kenningham

European Economics Weekly

Energy inflation will fall, but core will stay around 2%

The key event this week (for us at least) is the publication of our forthcoming European Economic Outlook setting out forecasts for 2022 and 2023. In brief, we think the euro-zone will come through the Omicron wave well, but growth will be lower and core inflation higher than the consensus expects, while the ECB will take baby steps towards “normalising” monetary policy. Next week we expect the first PMIs of the new year to show that the economy is still pretty weak, while Q4 GDP data for Belgium, France, Germany and Spain will be consistent with aggregate euro-zone GDP growth coming almost to a standstill. Drop-In (14:00 GMT, 26th Jan): UK Outlook -- More inflation, more interest rate hikes. Join our UK Economics team for a briefing on the 2022 outlook, including why we’re below consensus on growth but think the BoE will raise rates more than most expect. Register here.

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ECB increasingly split over inflation outlook

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Nordic & Swiss Economics Update

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20 January 2022
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