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 easing. President Lagarde’s protestations – she warned “we should not lower our guard” against inflation risks and claimed officials “did not discuss rate cuts at all” in the year’s final meeting – are falling on deaf ears in the financial markets, especially given that erstwhile hawk Isabel Schnabel earlier noted a “remarkable” drop in prices and called further tightening “rather unlikely”. Swaps markets are assigning high odds to the first reduction coming at the central bank’s March meeting, followed by another five moves over the course of the year.