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Case for rate hikes much stronger than in 2011

The ECB’s rate hikes in 2011 were a mistake, not just because they exacerbated the widening in peripheral bond spreads. Underlying inflation was subdued and policymakers were too concerned with acting pre-emptively to contain inflation expectations. They could hardly be accused of that this time! Based on the outlook for inflation, the case for normalising monetary policy is now much stronger.
Jack Allen-Reynolds Senior Europe Economist
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European Economics Focus

Euro-zone core inflation will remain higher for longer

We are revising up our forecast for core inflation in the euro-zone because the labour market is tighter, demand stronger and inflation expectations higher than we had anticipated. Moreover, fiscal policy will be tightened only gradually and there are significant upside risks to commodity prices. We think the core rate will remain above 2% during 2023-2024, keeping pressure on the ECB to tighten policy.

27 June 2022

European Economics Weekly

US recession fears won’t deter ECB

Fears about a possible US recession have prompted investors to revise their ECB interest rate expectations down this week, but we have pushed ours up to show the deposit rate peaking at 2%. While next week we expect the euro-zone economic sentiment indicator to add to the evidence that growth slowed in June, we think that policymakers at the central bank will be more concerned by the inflation data, which look set to reach a new record high.

24 June 2022

European Data Response

German Ifo Survey (Jun.)

The renewed decline in the German Ifo Business Climate Index for June provides further evidence that weaker demand is starting to affect manufacturing output. With inflation set to remain high and the country’s gas supply looking increasingly precarious, the chances of the country falling into recession this year have risen considerably.

24 June 2022

More from Jack Allen-Reynolds

European Economics Update

Rising inflation expectations causing alarm

Policymakers at the ECB are becoming more concerned about inflation expectations, with professional forecasters, financial investors, consumers and firms all anticipating that the pace of price increases will continue to accelerate. This makes it more likely that the Bank will begin normalising policy soon. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

10 May 2022

European Data Response

German ZEW Survey (May)

The small rise in the ZEW measure of German investor sentiment in May left it still very low. And the current conditions index fell further, which is consistent with our view that the economy will contract in Q2. The Sentix sentiment index for May paints a similarly downbeat picture for the euro-zone as a whole. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

10 May 2022

European Economics Weekly

Weakness of activity won’t deter the ECB

A rate hike by the ECB in July, or possibly even in June, looks increasingly likely. But policymakers seem to be in no hurry to announce a new tool to keep sovereign bond spreads contained. Meanwhile, the first official data for March, published this week, were weak and we think that worse is to come. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

6 May 2022
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