Bank of America expects the European Central Bank to implement a 25 basis point cut in its deposit rate at its September meeting, with a modest negative impact on the euro due to the unchanged guidance and weaker growth outlook.
Key points:
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Interest rate cut expectations:
- Deposit rate: It is expected to be cut by 25 basis points.
- Other policy rates: The interest rate is likely to be adjusted by 35 basis points due to the previously announced narrowing of the interest rate corridor.
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Directions and statement:
- appreciation: The statement is likely to acknowledge that the information provided supports the ECB’s previous inflation forecasts, but highlights weak growth.
- New predictions: The Saudi economy is expected to see lower growth, a slight increase in core inflation in the near term, and a stable outlook in the medium term. Inflation is expected to approach 2% by the end of 2025.
- Domestic price pressures: This is expected to be highlighted, especially in relation to high service price inflation.
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Forward steering:
- Approaching: The ECB is likely to maintain its data-driven, meeting-by-meeting approach to policy adjustments.
- Risks: There may be a slight bias towards monetary easing given the weak growth outlook and internal debates about whether this warrants faster rate cuts.
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Impact on the Euro:
- Expectations: A 25 basis point rate cut is fully expected, so a major market reaction is not expected.
- Risks: There could be some downside risks to the ECB’s guidance on growth concerns.
conclusion:
Bank of America expects the ECB to cut rates by 25bps without a major change in guidance, resulting in limited impact on the euro. The focus will remain on the data dependence of future policy actions, with risks tilted toward a more dovish stance due to the weak growth outlook. The euro’s reaction is expected to be limited, reflecting the ECB’s consistent approach to data-driven decision-making.
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