The ‘guardian of the euro’ will meet next Thursday
Oct. 11 () –
Bank of America (BofA) has expressed this Friday its disagreement with the market consensus regarding the rate calendar of the European Central Bank (ECB) by arguing that they anticipate that the reference rates will find their neutral level at 1.5%, for below the 2% level that the rest of the actors are discounting.
Through a report signed by Bank of America’s chief economist for Europe, Rubén Segura Cayuela, and the entity’s rate strategist, Ralf Preusser, they have anticipated that the question now is not so much how quickly the ECB will cut rates – since the president herself, Christine Lagarde, has opened the door to cuts from meeting to meeting – but to what extent they will go.
“Much further from what the consensus expects and further from what the markets are valuing,” these executives have responded to the formulation of that question.
Regarding the explanatory statement that supports this conjecture, they have explained that there are reasonable risk scenarios in which the eurozone economy needs stimulus, which requires a minimum of rates well below neutrality.
Secondly, they have pointed out that “it is not at all obvious” why 2% has become the ECB Governing Council’s estimate of neutral rates, while they have recalled that pre-pandemic models saw this as a upper limit.
Continuing along these lines, they have insisted thirdly that there is “little theoretical support” for a higher neutral rate in the eurozone and that most structural factors weigh on both demand and supply, which is why data is required. to answer what they consider to be an empirical question.
Fourthly, they have expressed that the data “clearly point” to the fact that the eurozone today saves more and invests less: “If neutral rates in the region have moved in relation to pre-pandemic levels, run the risk of having fallen”, have argued in favor of considering it for what they understand should now be the range of neutrality of interest rates.
“It is very difficult for us to argue with conviction that the market equilibrium interest rate for this economy is above that observed in 2019,” the BofA experts pointed out and then added that “it would not take much to argue in favor of a lower rate.”
“Therefore, we firmly believe that the neutral in the eurozone is, in the best of cases, 1.5%,” they have emphasized their speech against the idea of rates that would settle at 2% or even above.
On the other hand, they have focused on the fact that “it draws attention […] how little the market differentiates between the expected tapering cycle of the Fed and the ECB, even though these two economies could not be more different today than they are.
Linked to this, they have indicated that they remain “fundamentally optimistic” in European rates under the idea that the valuation of the ECB’s cut cycle offers “a fundamental value proposition to investors.”
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