The ECB’s hard choice: economy or inflation?

Industrial production in Germany fell by 0.3% for December and by 4.1% on the same month a year earlier. A deeper fall compared to the previous month, while surveyed analysts on average expected production to rise by 0.4% over the same period.

The new data underscores the difficult choices the ECB will have to make in the coming months as record price growth rates go hand in hand with falling economic activity.

The ECB will have to make choices as record inflation in decades requires tightening monetary policy and supporting the euro. On the other hand, industrial activity has been in a downtrend for almost four years.

A rise in interest rates is likely to increase pressure on manufacturing activity and increase borrowing costs, negatively affecting consumer credit.

The market reaction since last week suggests that the ECB will switch to fighting inflation, but the fading momentum in the economy calls this scenario into question.

The FxPro Analyst Team