We expect the euro-zone economy to grow at only a sluggish pace this year, with southern economies outperforming the core. Germany’s election will lead to only a modest loosening of its restrictive “debt brake”. France’s budget deficit will remain very high amid continued policy deadlock, leaving France’s bond market vulnerable to a loss of investor confidence. Meanwhile, with euro-zone inflation likely to average just below 2% this year we forecast the ECB to cut interest rates further than investors anticipate, taking the deposit rate down to 1.5% by the third quarter.
Elsewhere, we think that the Riksbank will reduce its policy rate to 2.25% in at the end of January, and the SNB and Norges Bank will cut rates in March.
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