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The European Central bank (ECB) is expected to implement more significant rate cuts than what the current market anticipates, according to analysts at BCA Research. The divergence between market expectations and BCA’s outlook is driven by the belief that deteriorating economic conditions in the Eurozone, including rising Inflation and recession risks, will prompt the ECB to cut rates more aggressively.

Market expectations are underestimating the extent of monetary easing, especially for 2025, as the Eurozone grapples with increasing economic challenges necessitating substantial policy responses. The ECB has already reduced its deposit rate from 3.75% to 3.5%, with another cut anticipated in December. However, BCA Research suggests that the market’s pricing in the possibility of an earlier cut in October is premature and based more on speculation rather than economic fundamentals.

Several key indicators argue against an immediate rate cut, including high services Inflation driven by recreation and insurance pricing. Although this Inflation is expected to ease, it provides a rationale for delaying additional cuts until December. BCA also expects inflationary pressures to diminish over time due to factors such as declining unit labor costs, weakening labor market conditions, and persisting disinflationary forces from the goods sector.

The market may be underestimating the ECB’s future monetary policy easing in 2025, as evident from the €STR curve pricing at a policy rate of 2% by mid-2025. BCA suggests that the ECB is likely to cut rates more than anticipated due to an impending recession in the Eurozone next year.

Furthermore, the deteriorating global industrial outlook, particularly in the US, could lead to a recession with spillover effects on European investment through trade and profit linkages. Weakening consumer confidence in Europe, coupled with declining investment and consumer spending, sets the stage for a Eurozone recession in 2025, prompting BCA to predict more aggressive rate cuts by the ECB.

BCA Research recommends a bullish stance on German bunds, anticipating lower yields as rate cuts exceed market expectations. The euro is expected to face downward pressure due to weak global growth and the prospect of more ECB cuts, leading BCA to advise selling the currency. Additionally, BCA remains cautious on European credit, urging investors to adopt a conservative approach given the weakening economic outlook and rising recession risks.

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