The euro-zone looks on course to fall into a mild recession in the coming quarters. Real incomes are falling, business sentiment has plummeted and growth in the region’s export markets is slowing. Nevertheless, the labour market is likely to remain tight and wage growth should accelerate, causing inflation to remain above target over the coming years. As a result, we expect the ECB to press ahead with an aggressive tightening cycle over the next 12 months, pushing interest rates above their neutral levels temporarily. The Bank will also implement a new spread-fighting tool, and we think there’s a good chance that it will have to restart its net asset purchases at some point in the coming year or so.
ECB Preview (19th July, 10:00 ET/15:00 BST): Our Europe team will be briefing on what to expect from the ECB ahead of its crunch July meeting. They’ll be talking about lift-off for rate hikes, what a weak euro means for policy`, the Transmission Protection Mechanism and much more. Register now.
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