ECB’s cautious interest rate stance to turn aggressive amid shallow recovery: BofA By Investing.com

Investing.com — The European Central Bank is taking a cautious approach to rate cuts, but Bank of America believes the ECB will be forced to cut rates more than expected to protect against a shallow economic recovery and rising inflation exceeds its target.

“We still see more cuts in 2025/26 than markets are pricing in, with a return to a 2% deposit rate by 3Q25 (at the latest) and 1.5% in 2026 at the latest,” economists at at BofA in their latest euro zone. Point of view.

The economic outlook is at the heart of this dovish call, as further weakening in economic activity could likely force the ECB to cut interest rates as early as October 2024, with cumulative cuts of 50 basis points in 2024 being a lower bound, economists said.

Europe’s recovery remains fragile, BofA believes, and will likely be shallow, pressured by several economic factors, including slowing growth in China, as well as political factors.

“Sentiment is deteriorating, the labor market is not as firm as it was, savings rates are rising again,” BofA said, adding that downside risks from political uncertainty outweigh “the possibility of a little fiscal slippage here and there.”

As economic growth is expected to remain sluggish, inflation is likely to be below the central bank’s 2% target, economists noted, forecasting core inflation in the euro zone at 2.8%, 1.9% and 1.8% respectively. % for 2024, 2025, 2026.

While the ECB remains cautious on rate cuts, inflation above the central bank’s target would force the ECB to cut rates to “their neutral rate assumption in 2025 and further into 2026,” BofA said, adding that this scenario remains the case their base.