The news on the euro-zone economy has continued to weaken in the early weeks of 2008. Most strikingly, the composite Purchasing Managers’ Index (PMI) has slipped to levels which, on some previous occasions such as May 2001, have been associated with falling interest rates. Lingering concerns over the outlook for inflation will mean that the European Central Bank does not begin to loosen policy for a while yet. But if the news on activity continues to deteriorate, interest rates should be falling by the middle of the year.
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