Regardless of whether the Eurozone falls into recession, economists at Wells Fargo see enough growth headwinds to suggest that the European Central Bank's (ECB) monetary tightening is done.
Eurozone rate hikes are done
The underwhelming growth outlook means ECB rate hikes are very likely done, with the most recent progress on the inflation front reinforcing the view that the peak in policy rates has already been reached. However, we believe the ECB will still want to see underlying inflation trends move closer to, and remain near, its 2% inflation target before it becomes comfortable embarking on a monetary easing cycle.
We do not forecast an initial ECB rate cut until the June 2024 meeting, although a steady series of rate cuts after that should see the ECB lower its Deposit Rate by a cumulative 150 bps to 2.50% between mid-2024 and early 2025. Overall, we view the risks as skewed toward the ECB lowering interest rates earlier, or more aggressively than generally expected.
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