The recent combination of rising inflation, hawkish signals from the ECB and some fall in interbank interest rates has led the markets to price back in a significant chance of a final rise in interest rates to 4.25%. (See Chart.) But with activity indicators pointing to a slowdown in GDP growth, core inflation, so far, holding steady at 1.9% and credit concerns remaining, we still expect the next move in interest rates to be downward.
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