The European Central Bank’s strong focus on inflation risks suggests policymakers could remain inclined toward additional interest rate increases, even as economic growth across the euro zone remains subdued, according to Bank of America analysts.
The bank said the ECB continues to place significant weight on upside inflation risks despite its formally symmetric 2% inflation target.
Officials have repeatedly emphasized their commitment to maintaining price stability, with recent policy decisions indicating greater concern about inflation remaining above target than falling below it.
Attention remains focused on the ECB’s quarterly economic projections, particularly end-of-horizon inflation forecasts that help investors gauge policymakers’ views on future interest rates.
According to the bank, the ECB’s June projections were broadly consistent with market expectations for two to three additional rate increases during the current tightening cycle.
Policymakers raised the deposit rate to 2.25% earlier this month and have continued to stress a meeting-by-meeting, data-dependent approach.
The research team currently expects one more rate hike in July, although lower oil prices following recent developments in the Middle East have increased the possibility of a delay until September or a temporary pause.
Looking further ahead, economists expect the ECB to begin easing policy in 2027 as inflation pressures moderate.
Interest rates could eventually return toward 2%, with the possibility of moving below that level if inflation undershoots the target and growth remains weak.
Beyond rates, investors are also monitoring the ECB’s shrinking balance sheet.
Quantitative tightening has reduced the balance sheet from a peak of €8.3 trillion in 2022 to roughly €6.3 trillion by the end of 2025, with further declines expected as maturing assets are not fully reinvested.
Falling excess liquidity could eventually influence money-market conditions and increase demand for ECB funding operations.
As a result, balance-sheet developments are likely to become a more important part of the policy outlook alongside decisions on interest rates.
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