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Euro-zone Economics

ECB to keep tightening despite deep recession

The euro-zone is on the cusp of a significant recession due to a severe squeeze on households’ real incomes, rising interest rates and weak external demand. The unemployment rate will rise as a result but will remain well below the peaks it reached in past recessions.  Against this backdrop, core inflation is likely to stay well above the ECB’s target, prompting the Bank to hike rates to 2.0% by the end of 2022 and a peak of 3.0% by early 2023. That said, fiscal vulnerabilities in the periphery will prevent the ECB from reducing its holdings of government bonds substantially.

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