BofA: What we expect from this week’s ECB meeting

BofA anticipates the European Central Bank (ECB) will implement a 25 basis point (bp) cut to the deposit rate at its September meeting, with a modestly negative impact on the EUR due to unchanged guidance and weaker growth outlook.

Key Points:

• Rate Cut Expectation:

  • Deposit Rate: Expected to be reduced by 25bp.
  • Other Policy Rates: Likely to adjust by 35bp due to the previously announced narrowing of the rate corridor.

• Guidance and Statement:

  • Assessment: The statement will likely acknowledge that incoming information supports the ECB’s previous inflation outlook but highlights weaker growth.
  • New Forecasts: Expected to show lower growth projections, a slight increase in near-term core inflation, and an unchanged medium-term outlook. Inflation is anticipated to approach 2% by the end of 2025.
  • Domestic Price Pressures: Expected to be flagged, particularly in relation to high services price inflation.

• Forward Guidance:

  • Approach: The ECB is likely to maintain its data-dependent, meeting-by-meeting approach to policy adjustments.
  • Risks: There may be a slight dovish tilt given the weakening growth outlook and internal discussions about whether this necessitates faster rate cuts.

• Impact on EUR:

  • Expectations: A 25bp rate cut is fully anticipated, so a significant market reaction is not expected.
  • Risks: There could be modestly negative risks related to the ECB’s guidance on growth concerns.

Conclusion:

BofA predicts a 25bp rate cut by the ECB with no significant change in guidance, leading to a limited impact on the EUR. The focus will remain on the data-dependence of future policy actions, with risks skewed towards a potentially more dovish stance due to weaker growth projections. The EUR’s reaction is expected to be contained, reflecting the ECB’s consistent approach to data-driven decision-making.

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This article was written by Adam Button at www.forexlive.com.