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A range of measures designed to approximate the euro area neutral rate are indicating that policy rates are becoming increasingly restrictive, and credit flows within the bloc’s bank-dominated financial system have collapsed, with October’s data showing the biggest 12-month drop in lending to businesses and households since the euro crisis. 12-month change in loans by euro area monetary financial institutions, billions euro A worsening economy and easing labour markets have not yet triggered a sharp decline in underlying inflation, but headline measures fallen to well within the European Central Bank’s target range, and policymakers are coming under pressure to begin...

Fading inflation pressures should boost real household incomes in the months ahead, helping support a stronger-than-anticipated rebound in consumer demand within key European markets. Industrial production levels might eke out a modest improvement if Chinese stimulus spending begins flowing in earnest and global inventory cycles normalize. And as rate expectations fall, financial conditions in the euro area are easing almost as quickly as in the United States. We think this could translate into a snapback in credit demand across the economy.  Bloomberg financial conditions indices