The euro-zone will remain in or close to recession in the first half of 2024 as the effects of higher interest rates continue to weigh on household consumption and investment, and fiscal policy is tightened. Headline inflation has already dropped sharply and will be close to the ECB’s 2% target for most of 2024. Although the labour market is still tight, it is easing and the level of vacancies is coming down from its recent highs. This should help to keep core inflation on a downward path. We suspect that the ECB will begin a policy easing cycle around April next year and forecast that it will cut its deposit rate from 4% currently to around 2.25% by the end of 2025.
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