Three factors that worry Bank of America about the ECB’s planned cut path

Author: Ruben Segura-Cayuela, Chief Economist for Europe at Bank of America

As expected, the ECB acknowledged that so far progress had been in line with expectations, and that we are almost at the first cut, but more data is needed to be sufficiently certain. The message was also consistent with data dependence and meeting-by-meeting decision; the ECB will not commit in advance to a particular path. The June decision refers to a cut in June, no more than that, at least for now and until services inflation has come down a lot. The ECB does not depend on the Fed, but the US (and China, and Japan) has an indirect impact. Oil will create noise, but as long as we get to 2025, they can tolerate the bumps.

Our baseline assumption holds, but we are a bit nervous about faster cuts in 1st half of 2025.
A few weeks ago, we argued that the ECB's move closer to June for the first cut creates a risk asymmetry that could also trigger a (temporary) market overreaction in pricing. That risk is perhaps even more evident today, even if we remain firmly convinced that the ECB will make three quarterly cuts this year.

While the market may focus on the 2024 cuts, we are a little more nervous for our base case of accelerating the cut cycle to one per meeting in 2025 to 2% in July 2025.

Three additional events in the past week have made us a little more nervous:

1. Gas price curves have risen, so the possibility of non-oil energy prices offsetting the recent rise in oil prices, should it persist, has been reduced over the last week. This creates some risk of a delayed return to 2% across the board.
2. German negotiated wage growth picked up in March. To the extent that this largely reflects a public sector agreement from 2023, the "news" content should be limited. Wage disinflation in other countries should offset the German pick-up in euro area negotiated wage growth in the first quarter of 2024, but that still means that the optics of wage growth may encourage a hawkish desire to proceed with cuts slowly.
3. Fiscal policy news in some euro area countries (France in particular) would point to even less ambitious deficit corrections than initially expected.

We maintain our forecast of one cut per meeting in 2025 to reach 2% in July. But the balance of risks has shifted towards fewer cuts by mid-2025 and more thereafter.