Inflation will fall below 2% in the Eurozone according to BofA. ECB may accelerate rate cuts
Inflation will drop to 1.4% next year according to BofA, due to insufficient demand and too tight monetary policy. The ECB may have the problem of inflation being too low compared to the 2% target. But hawks still fear new increases. Meanwhile, German industrial production still falls. Centeno: decisions on rates even before May
The ECB could have a significant problem with inflation next year. The opposite of what has been experienced in recent years. According to several economists, the Eurozone's inflation rate will fall below 2% in 2025. The drop could be significant: for Bofa inflation will decline to 1.4 per cent next year, so it will be far from the 2 per cent target. In the past few days, Citi and Unicredit had also forecast below the threshold in 2025, at 1.7 per cent and 1.8 per cent respectively.
The ECB inflation target
The ECB has a symmetrical target: this means that downside risks on prices must be considered as well as upside risks. 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 at 10.6 per cent in October 2022, fell to 2.4 per cent in November. In December there was an upturn to 2.9 per cent, but the figure was determined by statistical factors. Thus, the latest figure was also judged positive by analysts: the rise was lower than expected and core inflation, excluding energy and food, continued to fall (to 3.4%, from 3.6% in November). Monthly inflation is close to zero.
The numbers show that inflation, both in the upward and downward phases, has been driven by energy prices. So by supply factors, not demand factors. And now the ECB tightening will be felt at the highest level, hitting an already weak economy. Therefore economists see lower growth and inflation than expected by Frankfurt.
BofA's forecasts
According to BofA, the drop in inflation below the target will be linked to 'insufficient demand' and 'too tight policy' by the central bank. "The ECB prefers to do too much rather than too little, unlike the Fed," it noted. Therefore BofA sees the first rate cut in June. Frankfurt wants to wait until it is completely safe on wages. But this could lead to a slow reversal in monetary policy and an excessive cost for the economy. According to the US bank, cuts could accelerate in the second half of 2024. BofA warned that its forecasts might even underestimate the weakness of the economy. Monetary analysts predict a 50% probability of a rate cut as early as March, with six cuts in total this year.
Centeno: rate decisions even before May
Against this backdrop, some ECB board members are pushing for a looser monetary policy. "I don’t think we have to wait until May to make
decisions," Portuguese governor Mario Centeno told Econostream yesterday. "I see no sign that second-round effects on wages have materialised or will materialise or that wages will put further pressure on prices." A different position from that of President Christine Lagarde, who instead highlighted the risks associated with wages.
For Centeno, 'the most recent developments on inflation and the economy have brought the time for easing closer' and therefore the rate cut will be 'sooner than was thought until recently'. The Portuguese governor pointed out that December's inflation was 'positive news', while the latest Pmi indices 'were not good'. French Governor François Villeroy de Galhau reiterated yesterday that the ECB will cut rates in 2024, adding only that this will happen 'when inflation expectations are firmly anchored at 2%'.
German industrial production falls again
Eurozone unemployment data for November showed a drop to a low of 6.4 per cent. The economic weakness has not yet transferred to the labour market but could do so soon according to Centeno. Regarding prices, risks remain on the energy and supply front, although the problems in the Red Sea will not significantly affect inflation according to Goldman Sachs. Meanwhile, however, the economy is contracting in many countries. German industrial production fell more than expected again in November (-0.7% instead of the expected -0.2%). And services could also slow down in the coming months, according to an ECB study.
