The Euro area economy remains under pressure according to Bank of America analysts, who warned that recent currency and rate moves have effectively tightened financial conditions, dampening growth and inflation prospects.
In a note to clients this week, BofA said that “FX and real rates moves represent an exogenous tightening of financial conditions equivalent to somewhere between one and two policy rate hikes since the June meeting, when the ECB started talking about being in a good place.”
The bank stated that “this will weigh on medium-term inflation.”
BofA said it “continues to find reasons why the Euro area economy is not in a good place,” pointing to weak activity, stagnant survey data, and lingering payback from first-half frontloading.
“Activity is weak, soft data moving sideways and the payback from 1H25 frontloading is still awaited,” the analysts wrote.
While inflation surprised on the upside in September, BofA expects that strength “is likely to unwind” and said monetary policy remains constrained.
“ECB speak is no longer fully one-sided, but it remains far from being balanced enough for a cut in December,” the bank noted. Still, it views rate reductions as inevitable, stating that “ECB cuts are more a ‘when’ than ‘if’ story.”
The bank’s analysts also shared impressions from recent meetings in Rome, describing the macro backdrop as “a period of domestic calm.”
They added that “better-than-expected 2025 deficit gives hope for an exit of EDP by Spring 2026,” while defence spending is “on the rise, but very gradually.”
