The ECB is wide open to cutting rates below neutral - BofA
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THE ECB IS WIDE OPEN TO CUTTING RATES BELOW NEUTRAL - BOFA
Most analysts said the ECB's last policy meeting was more hawkish than expected as the central bank softened its language, but remained noncommittal about the monetary easing path.
However, BofA's economists beg to differ. They think the ECB suggested it is ready to stimulate the economy by cutting below the so-called 'neutral rate'.
"The ECB goes from a hawkish bias (need to keep rates restrictive for as long as necessary) to a dovish one, leaving the door wide open to taking rates below neutral," BofA economists say.
"For now, the message is clear, the ECB is heading to neutral, wherever that is, at a speed determined by the data, meeting-by-meeting," they add.
The 'neutral rate' is the theoretical interest rate that would keep the economy at full employment and stable inflation at its long-run equilibrium.
Here are the reasons why BofA's economists are comfortable with the view the ECB is open to cutting below neutral.
First, the central bank dropped the reference to keeping rates in a restrictive period for the foreseeable future.
Second, the ECB forecasts show core inflation at 1.9% in both 2026/2027, with headline inflation at 2% on average over these two years. That's a quasi-endorsement of the market pricing of a terminal rate of at least 1.8%.
Third, the ECB said that most underlying inflation measures were suggesting a return to the 2% medium-term target "on a sustained basis".
(Stefano Rebaudo)
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