Inflation in the Eurozone will fall below 2% according to BofA. ECB May Accelerate Rate Cuts – MilanoFinanza News

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The ECB could have a significant inflation problem next year. The opposite of what has been experienced in recent years. According to several economists, the inflation rate in the Eurozone will fall below 2% in 2025. The drop could be significant: for Bofa, inflation will fall to 1.4 percent next year, so it will be far from the 2 percent target. In recent days, Citi and Unicredit also forecast below the threshold in 2025, at 1.7 percent and 1.8 percent, respectively.

ECB inflation target

The ECB has a symmetrical objective: this means that both downside risks and inflationary risks need to be taken into account. But many members of the Governing Council in Frankfurt remain concerned only about rising inflation despite the sharp drop in data. The inflation rate in the eurozone, which was 10.6 percent in October 2022, fell to 2.4 percent in November. There was an increase to 2.9 percent in December, but that number was determined by statistical factors. Analysts therefore evaluated the latest data positively: growth was lower than expected, and core inflation excluding energy and food continued to decline (to 3.4% from 3.6% in November). Monthly inflation is close to zero.

The figures show that inflation, both in the upswing and in the downswing, was driven by energy prices. That is, supply, not demand factors. And now the ECB’s tightening will play out at the highest level, hitting an already weak economy. Economists therefore see lower growth and inflation than Frankfurt expected.

BofA Forecasts

According to BofA, inflation falling below target will be linked to “insufficient demand” and “excessive policy” by the central bank. “The ECB, unlike the Fed, prefers to do too much rather than too little,” he noted. BofA therefore expects the first rate cut in June. Frankfurt wants to wait until it is completely secure on wages. However, this could lead to a slow turnaround in monetary policy and excessive costs to the economy. According to the US bank, the cuts could accelerate in the second half of 2024. BofA warned that its forecasts may even underestimate the weakness of the economy. Currency analysts predict a 50% chance of a rate cut as early as March, for a total of six cuts this year.

Centeno: rate decision before May

In this context, some members of the ECB’s banking board advocate a looser monetary policy. “I don’t think we have to wait until May to do that
decision,” Portuguese Governor Mario Centeno told Econostream yesterday. “I don’t see any signs that they will materialize or that there will be secondary effects on wages or that wages will put further pressure on prices.” A different stance from President Christine Lagarde, who instead highlighted the risks associated with wages.

For Centeno, “the latest developments in inflation and the economy have brought the time for easing closer” and therefore the rate cut will be “sooner than previously thought”. The Portuguese governor pointed out that December inflation was “positive news” while the latest PMI indices “were not good”. French Governor François Villeroy de Galhau yesterday reiterated that the ECB would cut rates in 2024, adding only that it would do so “when inflation expectations are firmly anchored at 2%.

German industrial production is falling again

Eurozone unemployment data for November showed a drop to a minimum of 6.4 percent. The economic weakness has not yet spilled over into the labor market, but according to Centen, it could soon. As for prices, risks remain on the energy and supply fronts, although the Red Sea issues will not significantly affect inflation, according to Goldman Sachs. Meanwhile, the economy in many countries is declining. German industrial production again fell more than expected in November (-0.7% instead of the expected -0.2%). And according to an ECB study, services could also slow down in the coming months.

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