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Summary

United States: Riding the Wave

• The Consumer Price Index ended the year at 2.9% year-over-year, which is a minor improvement from its 3.1% rate in January 2024 and points to stalled progress on the road back to the Federal Reserve's 2% inflation target. We now look for only two 25 bps rate cuts in the second half of 2025 and expect the FOMC to hold at a target range of 3.75%-4.00% through 2026.
• Next week: Leading Economic Index (Wed.), Existing Home Sales (Fri.)

International: China's Economy Finished 2024 on a Solid Note, but Challenges Remain

• China's economy finished 2024 on a sturdy note, with policy support measures helping to boost activity late last year. Q4 GDP firmed more than expected to 5.4% year-over-year, while December activity data also showed an acceleration in retail sales and industrial output. We still expect 2025 to be a challenging year, however, with higher U.S. tariffs weighing on China's export sector and domestic growth unlikely to be sustained unless the government announces large-scale fiscal stimulus.
• Next week: Canada CPI (Tue.), Bank of Japan Policy Rate (Fri.), Eurozone PMIs (Fri.)

Interest Rate Watch: FOMC Likely to Enter an Extended Pause in Its Recent Easing Cycle

• We share the widely-held expectation that the FOMC will maintain its current target range of 4.25%-4.50% for the federal funds rate at its upcoming meeting on January 29. We also think the FOMC will keep rates on hold until the second half of the year before easing again.

Topic of the Week: Beige Book Shows Moderate Expansion Across All Districts

• The latest Beige Book revealed a picture of continued economic growth, with all 12 of the regional banks reporting a “slight” to “moderate” expansion in activity over the period. Employment across the Districts was resilient, and prices broadly rose. Tariffs clouded the economic outlook for many contacts.

Full report here.

The final consumer price index report for 2024 on Tuesday will be closely watched for further signs of easing in underlying price pressures in Canada, but we expect the data will be distorted by the GST holiday that began on Dec. 14. It applied to a subset of consumer purchases including some groceries, toys, and restaurant meals.

We expect headline inflation to edge down in December to 1.5% from 1.9% year-over-year. This slowdown was largely driven by slower food price growth, which offsets an increase in energy inflation. Excluding those two volatile components, we look for core inflation to remain steady at 1.9%.

The Bank of Canada’s preferred “core” measures are calculated from price data that is adjusted to exclude the impact of indirect taxes, which means they should be cleaner reads. We expect the trim and median measures to hover around 2 ½ %, consistent with a softening economy that continues to weigh on domestic price pressures.

Mortgage interest costs continue to disproportionately impact total CPI growth, and also have an impact on the core measures, but are expected to continue to slow with a lag from the BoC interest rate cuts last year. By our count, year-over-year growth in median and trim measures would have been 0.5% lower on averrage in November (2.2% and 2.1%, respectively) if mortgage interest costs weren’t included in the calculation.

The release of the BoC’s Business Outlook Survey for Q4 is also out on Monday. We think inflation expectations likely continued to moderate, given readings have stayed near the central bank’s 2% target for four consecutive months. With job openings declining—a sign of weakening hiring demand—expected wage growth should slow further. The BoC will be paying close attention to any further deterioration in key capacity pressures such as labour shortages and supply chain disruptions. Those could signal a deeper economic slowdown, a wider economy output gap, and disinflationary risks going forward.

Week ahead data watch

On Thursday, we expect Canadian retail sales to hold steady in November in line with Statistics Canada’s advance estimate. Seasonally adjusted auto sales jumped 8%, while sales at gas stations likely bounced back in November due to higher prices. But weak core sales are expected to offset the growth.

• Markets brace for impact ahead of Trump’s inauguration.
• BoJ seen raising rates at first gathering of 2025.
• Euro and Pound traders turn gaze to PMIs.
• Canada and New Zealand CPI data to shape BoC and RBNZ bets.
• World Economic Forum in Davos also in focus.

Trump takes the oath of office

Another interesting week lies ahead of us, with the spotlight falling on the inauguration of US president-elect Donald Trump on Monday, and on the BoJ, which is kickstarting the first round of central bank decisions for 2025 on Friday.

Getting the ball rolling with Trump and the US, the dollar has benefited and Treasury yields have surged lately on increasing expectations that the Fed may need to proceed with extra caution on rate cuts this year. Trump’s tariff pledges and his promises of corporate tax cuts and deregulation have raised concerns about a resurgence of inflation, which has been proving sticky even before such policies are enacted. What’s more, the US economy seems to be firing on all cylinders, with the labor market seeing strong growth in November and December, corroborating the notion that there is no need for the Fed to rush into lowering interest rates further.

According to Fed funds futures, investors are currently expecting 40bps worth of reductions by December 2025, which is a more hawkish projection than the Fed’s own upwardly revised ‘dot plot’, which pointed to two 25bps reductions. And this is even after news headlines suggested that the new US administration is likely to adopt a gradual approach on tariffs and after the US CPI numbers for December came in somewhat softer-than-expected.

With all that in mind, investors may be eagerly awaiting Trump’s inauguration speech for more clues about how he plans to proceed with his policies, and this is evident by the fact that the implied volatility of 1-week expiry FX options has been trending north and has continued to rise even after factoring in Monday’s inauguration. In other words, market participants see the event as a source of volatility for the FX market.

Should Trump sound more hawkish on tariffs than the latest headlines suggest, the dollar is likely to take another shot in the arm as Treasury yields rebound. A potentially risk-averse mood could also weigh on equities, specifically stock futures, as the New York Stock Exchange will remain closed in celebration of Martin Luther King Day. However, whether any declines will be sustained will also depend on whether Trump will bolster the hype about extending corporate tax cuts, which is a supportive variable.

Stock traders will have more to digest the following day as Netflix will report its earnings results for the last quarter of 2024.

Will the BoJ hike rates right off the bat?

Flying to Japan, the BoJ will kickstart the first round of central bank decisions for 2025 on Friday. At its last meeting for 2024, the BoJ decided to refrain from hiking interest rates, with Governor Ueda saying that they need more information to raise interest rates again, placing emphasis on wages and the uncertainty surrounding US president-elect Trump’s economic policies.

Since then, data revealed that the Nationwide CPI accelerated notably in November, while the closely watched Tokyo prints pointed to even hotter price pressures in December. Wages also sped up in November. What’s more, the Summary of Opinions from the December gathering suggested that a hike may be on the cards sooner than investors were led to believe following Ueda’s press conference.

Combined with hawkish remarks by several policymakers thereafter, including Ueda this week, who said that he heard many encouraging views on potential pay hikes since the turn of the year, the aforementioned developments prompted investors to pencil in around an 80% chance of a quarter-point interest rate increase on Friday.

Having said that though, the BoJ has a strong record of disappointing hawkish bets, and this may be another one of those occasions if president-elect Trump sounds too aggressive about his tariff plans at his inauguration speech on Monday. Therefore, if the Bank refrains from hitting the hike button once again, the yen is likely to tumble.

The opposite could be true should policymakers agree to hike, but the risks may be asymmetrical. The negative impact on the yen if the Bank were to stay on hold may be larger than the positive impact associated with a hike. Nonetheless, a falling yen may not be the easiest trade in town as further declines may encourage a new round of intervention by Japanese authorities.

January PMIs the drivers for Euro and Pound

From the Eurozone and the UK, the preliminary S&P Global PMIs for January are coming out on Friday. The euro and the pound have been bleeding recently, with the former falling victim to the widening divergence in monetary policy expectations between the ECB and the Fed and the latter feeling the heat of fears about a Truss 2.0 episode as well as the latest round of weak UK data. Just this week, the softer-than-expected inflation data for December was followed by weak GDP, December retail sales, and industrial production numbers for November.

Both the ECB and the BoE are expected to cut interest rates more aggressively than the Fed this year, with the former seen cutting another 95bps and the latter another 60bps. Thus, PMIs pointing to more troubles for the Eurozone and UK economies could further widen the policy divergence between the ECB and the BoE with the Fed and thereby deepen the wounds of the euro and the pound.

The US S&P Global PMIs will also be released on the same day, but dollar traders will be already digesting Trump’s policy signals and thus, the impact of those numbers may be limited and short-lived.

Loonie and Kiwi traders await CPI reports

Following this week’s US CPI figures, Canada and New Zealand are scheduled to release their own inflation prints on Tuesday. The Canadian jobs report for December revealed strong employment gains, with the unemployment rate unexpectedly dropping. Still, investors are assigning a decent 65% for the BoC to cut interest rates by another 25bps on January 29. For that probability to be lowered meaningfully, Canada’s CPI numbers may need to come in hotter-than-expected, which could encourage loonie traders to increase their long positions. A positive business outlook survey by the BoC on Monday may also help.

In New Zealand, a February rate cut seems to be a done deal. The question is whether it will be a quarter- or a half-point cut. At their November gathering, RBNZ policymakers cut the cash rate by 50bps and signaled that if economic conditions continue to evolve as projected, they could lower the OCR further early in 2025.

Since then, GDP data revealed that the economy slipped into technical recession in Q3, allowing investors to assign a strong 65% chance that another bold 50bps reduction may be looming, especially as inflation rested at 2.2% y/y in Q3, very close to the midpoint of the Bank’s 1-3% target range.

Ergo, should next week’s data reveal that inflation returned, or even fell below that 2% midpoint, market participants may start considering a larger 75bps reduction, and the kiwi could resume its prevailing steep downtrend against its US counterpart.

Global leaders gather in Davos

Elsewhere, the World Economic Forum in Davos, Switzerland will take place. The meeting gets underway the same day with Trump’s inauguration and thus, Trump is expected to deliver a speech virtually on Thursday. Other speakers include Ukrainian President Zelenskyy, who will attend in person and speak on Tuesday.

Geopolitical tensions will be one of the main topics at the gathering, and thus, it will be interesting to see what risks global leaders foresee for their economies this year. Their views on Trump’s agenda may be closely monitored as well, while artificial intelligence will also be a key topic of discussion.

The bond market sell-off stabilised ahead of Donald Trump's inauguration on Monday, as the December core inflation data from the US came out on the soft side (+0.2% m/m SA, Nov. +0.3%). Easing hotel, core goods and health care inflation contributed to the cooling but importantly, broader housing and non-housing services inflation remain at moderating trends as well. The move gained further momentum on Thursday, when the Fed's influential Chistopher Waller flagged that three or four rate cuts could be possible this year if 'data cooperates'. While Trump's election win has brought inflation fears firmly back to markets' agenda, we find little reason for concern in the hard data received so far, and still think the Fed will continue cutting rates in March. Read more from Global Inflation Watch - Hard data signals continuing disinflation, 16 January.

Most of our central bank views remain on the dovish side of market pricing even after this week's rally. This also implies further downside potential to bond yields on both sides of the Atlantic. In our updated forecasts, we now see 10y Bund yield at 2.25% in 12M horizon and maintain 10y UST yield view at 4.20%, read more from Yield Outlook - The pendulum has swung too far, 13 January. We also tweaked our call for Riksbank, and now see the next cut already at the upcoming January meeting, see RtM Sweden, 17 January.

On the geopolitical front, the fear of Trump allowing 'all hell to break out' motivated Israel and Hamas to finally agree on a ceasefire set to begin on Sunday. The actual content of the deal has not changed much from preliminary plans, and the implementation remains uncertain. Importantly, the future governance of Gaza remains an open question.

Next week, all eyes will be on which executive orders Trump enacts once he enters the White House. Rumoured topics of up to 100 separate orders include everything from tariffs to immigration to regulation and more. For the near-term macro-outlook and markets, any new announcements on tariffs will be the key to follow. The mixed signals heard from news sources and Trump himself over the past weeks suggest there is at least some level of internal disagreement within the Republican party over the topic. Our best guess is that any announcements made next week would be limited to targeted tariffs against specific countries and/or goods. We would expect any broader universal tariffs to be announced only at a later stage.

The upcoming week will be a relatively quiet one in terms of macro data. The most important release will be the January Flash PMIs on Friday, where we expect the euro area composite index to recover back to the neutral level of 50.0 (Dec. 49.6). We expect some improvement to both manufacturing and services indices. The former will still likely remain well below 50, which means production continues to contract, but just at a slower pace.

Early Friday morning, we expect the Bank of Japan to hike rates by 25bp. Analysts are divided between no change and a hike while markets price in nearly 80% probability of a hike at the time of writing. The latest December CPI data is due for release just before the monetary policy decision. This week, we recommended a short USD/JPY position as part of our annual FX Top Trades 2025, 14 January.

Full report in PDF.

Gold price eased from five-week high on Friday, driven by a partial profit-taking at the end of the week, following a three-day rally.

The yellow metal was supported by recent US economic data which showed weaker than expected US core inflation numbers in December and revived narrative of more Fed rate cuts in 2025.

Markets bet for two cuts against initially signaled only one cut this year, while the latest comments from Fed Governor about possible three or four cuts if coming data show further weakening, that added to hopes of stronger policy easing by the US central bank.

However, economists remain cautious in anticipation of stronger boost of the US economic growth by Trump’s administration and new tariffs on imports to US that would provide fresh boost to inflation.

Technical picture remains firmly bullish on daily chart and underpins the action, as gold heads for the third straight weekly gain that adds to positive near-term outlook.

We look for weekly close above broken barriers at $2700/$2693 (psychological / Fibo 61.8% of $2790/$2536) to confirm bullish stance.

Also, these levels now reverted to solid supports which should ideally contain dips and keep larger bulls intact.

Immediate targets lay at $2726/30 (Dec 12 lower top / Fibo 76.4%) followed by $2749 (Nov 5/6 double top) which guards a record high at $2790 (posted on Oct 31).

Caution on dip below $2693, although broader bias is expected to remain with bulls while $2675 support (broken bear trendline / rising 10DMA) holds.

Res: 2726; 2730; 2749; 2762.
Sup: 2700; 2693; 2675; 2663.

Markets

European equities are on track to end the week with a bang. The EuroStoxx50 had an excellent week, shrugging off a weak start to finish around 5% higher and to its strongest level since 2000. Wall Street, already being near record highs had to settle for less. They do open with gains that make them head for the best week since the November US election. The European relief rally in particular is striking from a timing point of view given Trump is about to embark on its second presidential term next Monday – during which financial markets are closed for Martin Luther King Jr. Day, by the way. Similarly we’ve had few data prints over the last couple of weeks that were clearly indicating the European economy is picking up. The stock boost does coincide with core bonds taking a breather. The weekly US tally amounted to up to -20 bps at the belly of the curve. Lower-than-expected inflation numbers and Waller were responsible for the bulk of the move. The influential Fed governor expected more rate cuts in 2025H1 if more such inflation numbers arrive. Markets up until then weren’t really considering such a scenario, even after the sharp CPI repositioning. Front end yields do recover a bit today on solid housing & industrial production data. Ahead of his inauguration, Trump already had “very good” call with his Chinese counterpart, a.o. on trade. Such headlines now deserve market attention. European (swap) rates joined the US lower with weekly declines of up to around 10 bps in the same bucket of the curve. UK gilts outperformed, ending this week between -17 and -23 bps lower. A series of British data reminded investors the UK is more of a European growth story than a US. Slower-than-expected inflation, a disappointing industrial update and declining UK retail turnover (in December) brought a February rate cut by the Bank of England back to the table (90% discounted). FX experienced a similar pause this week in what was up until now a one-way stronger dollar driven market. The trade-weighted index retreated slightly after hitting a more than 2-yr high around 110 on Monday. DXY is currently changing hands around 109.2. EUR/USD at the beginning of the week was in serious peril, temporarily losing the 1.0201 mark as a last line of defense before parity. The duo has been trading within a 1 big figure range after avoiding this highly consequential technical break. It's up to Trump from next week on whether the pair can hold on to it short term. Sterling was the G10 underperformer. EUR/GBP built on a recovery that began last week to trade around its highest level since end-October (+/- 0.845). GBP oscillated against USD around 1.22, the lowest level since November 2023. The Japanese yen stood at the other side of the aisle, benefiting in from (core) bond yields easing elsewhere but rising domestically. Markets have all but fully embraced a third rate hike (25 bps) by the Bank of Japan at the meeting next week. Tactical leaks by BoJ officials over these last couple of days made sure of that. USD/JPY trades around 155.7, EUR/JPY hovers around 160.

News & Views

Aside from the 2024 GDP growth and activity data published this morning, the statistical office of China also reported the population numbers at the end of 2024. The national population was estimated at 1 408 mln, an annual decrease of 1.39 mln. The number of births and birth rate both rose slightly to respectively 9.54 mln (from 9.02 mln) and 6.77 births per 1000 people (from 6.39 in 2023). However, the rise is mostly a delayed rebound after COVID and is expected to reverse in 2025 again. The number of deaths in 2024 also declined to 10.93 mln. The urbanization rate in the country rose further, with the share of urban population in the total population at 67% (+0.84 ppts). This higher urbanization rate is seen as one factor behind the structurally declining birth rate.

The National Bank of Poland yesterday as expected left its policy rate unchanged at 5.75%. The press release didn’t contain any signs that it might consider a less hawkish stance anytime soon even as recently published December inflation data came out on the softer side of expectations (headline 4.8%, core 4%). The NBP expects inflation to remain markedly above the 2.5% target, driven by the effects of the already introduced increases in energy prices, as well as rises in excise duties and administered services prices. Core inflation will probably also stay elevated. Some factors easing the inflationary pressures mentioned in the December statement were not mentioned anymore. At today’s presser, governor Glapinski indicated that CPI will exceed 5% in the coming months and won’t fall to target in the nearest quarters (expected at current level end this year). Glapinski concludes that the decision on rate cuts has to be delayed for some time.

Daily Pivots: (S1) 1.4336; (P) 1.4370; (R1) 1.4427; More...

Immediate focus is now on 1.4466 resistance with current strong rally ins USD/CAD. Decisive break there will resume larger up trend to 1.4667/89 long term resistance zone. On the downside, break of 1.4279 support will bring deeper correction. But downside should be contained by 55 D EMA (now at 1.4187) to bring rebound.

In the bigger picture, up trend from 1.2005 (2021) is in progress for retesting 1.4667/89 key resistance zone (2020/2015 highs). Medium term outlook will remain bullish as long as 1.3976 resistance turned holds (2022 high), even in case of deep pullback.

Sharp selloff in commodity currencies against Dollar is dominating market action as the US session unfolds. While broader trading remains subdued, the sudden weakness in these currencies appears tied to trader caution ahead of President-elect Donald Trump's inauguration on Monday. Concerns over tariff policies could be the main driver of the moves, in the absence of other clear fundamental catalysts.

Canada, Mexico, and China are widely speculated to be high on Trump’s tariff agenda. The tariffs may serve as leverage to address issues like fentanyl exports or re-exports impacting the United States.

However, the specifics of Trump’s strategy remain a “wild card.” Possible scenarios include blanket tariffs on major trading partners, sector-specific measures, immediate enactment via executive orders, or staggered monthly increases. Or, it could be a mix of these approaches.

For the week, Sterling remains the weakest performer, followed by Loonie and Dollar. On the other hand, Japanese Yen leads gains with the Aussie and Swiss Franc rounding out the top three. Kiwi and Euro are trading in mixed positions. However, the current selling pressure on commodity currencies could alter these rankings as the week comes to the close.

ECB's Nagel: Should avoid rushing monetary policy normalization

German ECB Governing Council member Joachim Nagel in an interview with Platow Brief, highlighted persistent services inflation and a "high level of uncertainty," referencing concerns about global trade dynamics as Donald Trump prepares to return to the White House next week.

"We should therefore not rush into anything on the path to monetary policy normalization," Nagel stated.

Meanwhile, he defended the ECB’s discussions of a more aggressive 50-basis-point rate cut during its December meeting, noting that such debates are a normal part of policy deliberations.

ECB's Elderson: Rate setting is a question of speed and magnitude

ECB Executive Board member Frank Elderson emphasized the delicate balance the central bank must strike in setting interest rates during an interview with Het Financieele Dagblad.

He warned, "If we lower the interest rate too quickly, dialling down services inflation sufficiently could become complicated." At the same time, he acknowledged the risks of maintaining rates too high for too long, which could lead to undershooting ECB's inflation target.

"The markets don’t think we’ve finished easing now that we’re at 3% and I don’t think we have, either," he added. "Setting interest rates is ultimately a question of how fast and how much."

Eurozone CPI finalized at 2.4% in Dec, core CPI at 2.7%

Eurozone inflation was finalized at to 2.4% yoy in December, up from November's 2.2% yoy. Core CPI, which excludes energy, food, alcohol, and tobacco, held steady at 2.7% yoy. Services made the largest contribution to the annual headline inflation rate (+1.78 percentage points), followed by food, alcohol, and tobacco (+0.51 pp), non-energy industrial goods (+0.13 pp), and energy (+0.01 pp).

In the broader EU, inflation was finalized at 2.7% yoy, up from 2.5% yoy in November. Ireland recorded the lowest annual inflation rate at 1.0%, followed by Italy at 1.4%, with Luxembourg, Finland, and Sweden at 1.6% each. On the other end, Romania (5.5%), Hungary (4.8%), and Croatia (4.5%) posted the highest inflation rates.

Across the EU, annual inflation rose in 19 member states, remained unchanged in one, and fell in seven compared to the previous month.

UK retail sales fall -0.3% mom in Dec, down -0.8% qoq in Q4

UK retail sales volumes declined by -0.3% mom in December, significantly missing expectations for 0.4% mom increase. The drop was primarily driven by reduced supermarket sales, partially offset by a rebound in non-food stores such as clothing retailers, which saw recovery after recent declines.

On a quarterly basis, sales volumes in Q4 fell -0.8% qoq compared with Q3, highlighting a slowdown in consumer activity. However, year-on-year, Q4 sales volumes rose 1.9% compared to the same period in 2023.

China's Q4 GDP growth surpasses expectations, full-year growth hits 5% target

China’s economy ended 2024 on a strong note, with GDP expanding by 5.4% yoy in Q4, beating market expectations of 5.0%. This marked a significant acceleration from 4.6% in Q3, 4.7% in Q2, and 5.3% in Q1. The robust Q4 performance pushed full-year GDP growth to 5.0%, aligning with the government’s target of “around 5%.”

December's economic indicators also showed positive momentum. Industrial production surged 6.2% yoy, exceeding the forecast of 5.4%. Retail sales grew by 3.7% yoy, marginally beating expectations of 3.5%. However, fixed asset investment lagged, rising only 3.2% year-to-date, just below the 3.3% forecast.

Despite the upbeat data, concerns remain. Statistics Bureau spokesperson Fu Linghui acknowledged lingering weakness in consumer spending and cautioned that in 2025, the “unfavorable impact of external factors may deepen.”

BNZ PMI at 45.9: NZ manufacturing completes 2024 fully in contraction

New Zealand's BNZ Performance of Manufacturing Index rose marginally in December, increasing from 45.2 to 45.9. While this marks a slight improvement, the sector remains in a prolonged contraction, far below the long-term average of 52.5 since the survey's inception. December also marked the 22nd consecutive month of contraction, a record-breaking trend for the PMI.

Catherine Beard, Director of Advocacy at BusinessNZ, noted that 2024 was unprecedented, as it was the first year in the survey’s history with all 12 months in contraction. By comparison, the next closest period was 2008 during the Global Financial Crisis, which saw nine months of contraction.

Breaking down the December data, production dropped further, slipping from 42.3 to 41.9. Employment showed modest improvement, rising from 46.9 to 47.6, while new orders also edged up from 44.5 to 46.5. However, finished stocks fell significantly, declining from 49.2 to 45.9, and deliveries dipped slightly below the neutral 50 mark, moving from 50.0 to 49.8.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.4336; (P) 1.4370; (R1) 1.4427; More...

Immediate focus is now on 1.4466 resistance with current strong rally ins USD/CAD. Decisive break there will resume larger up trend to 1.4667/89 long term resistance zone. On the downside, break of 1.4279 support will bring deeper correction. But downside should be contained by 55 D EMA (now at 1.4187) to bring rebound.

In the bigger picture, up trend from 1.2005 (2021) is in progress for retesting 1.4667/89 key resistance zone (2020/2015 highs). Medium term outlook will remain bullish as long as 1.3976 resistance turned holds (2022 high), even in case of deep pullback.

German ECB Governing Council member Joachim Nagel in an interview with Platow Brief, highlighted persistent services inflation and a "high level of uncertainty," referencing concerns about global trade dynamics as Donald Trump prepares to return to the White House next week.

"We should therefore not rush into anything on the path to monetary policy normalization," Nagel stated.

Meanwhile, he defended the ECB’s discussions of a more aggressive 50-basis-point rate cut during its December meeting, noting that such debates are a normal part of policy deliberations.

ECB Executive Board member Frank Elderson emphasized the delicate balance the central bank must strike in setting interest rates during an interview with Het Financieele Dagblad.

He warned, "If we lower the interest rate too quickly, dialling down services inflation sufficiently could become complicated." At the same time, he acknowledged the risks of maintaining rates too high for too long, which could lead to undershooting ECB's inflation target.

"The markets don’t think we’ve finished easing now that we’re at 3% and I don’t think we have, either," he added. "Setting interest rates is ultimately a question of how fast and how much."