There has been a further slight improvement in prospects for the euro-zone in recent weeks. Business surveys suggest that activity is no longer contracting sharply, headline inflation seems to be past its peak, and wholesale gas prices have plunged. However, the economy probably shrank in Q4 and the near-term outlook is still poor, not least because of the impact of tighter monetary policy. What’s more, underlying price pressures remain intense. The core inflation rate rose in December and looks set to stay well above 2% this year. We expect the ECB to raise its deposit rate further in the coming months, but to a peak of 3% rather than the 3.5% priced in by financial markets.
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