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Tighter monetary policy starting to bite

The latest business surveys suggest that the euro-zone will stagnate or suffer only a mild recession, but the money and credit data paint a much gloomier picture. Net lending was negative in December and lower than in any month since 2014, when the economy and banks were still recovering from the euro-zone crisis. And the private sector credit impulse, which puts lending on a comparable basis with economic growth, points to steep declines in GDP. With interest rates set to keep rising, we expect further weakness in the credit data to signal that the euro-zone entered a recession at the start of this year. Nonetheless, with core inflation at a record high of over 5% in January and set to remain high for many months, we think the ECB will raise its deposit rate to a peak of 3.5% in the coming months.

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