Synopsis:

BofA expects the ECB to cut all three policy rates by 25bps at next week’s meeting while maintaining its January guidance. However, growing internal divisions on whether policy remains "restrictive" could lead to shifts in communication, setting the stage for future policy uncertainty.

Key Points:

1️⃣ ECB to Cut All Three Policy Rates by 25bps 🔻

• No need to change guidance, as it is vague enough to allow for another move.
• Disinflation remains on track, and the ECB still expects a delayed but eventual recovery.
• The risk assessment remains unchanged, reinforcing the view that rates are still restrictive.

2️⃣ Divisions on 'Restrictive' Language Likely to Grow 📉

• Next week is likely too soon to remove the word "restrictive" from the statement.
• April could be the bigger test for adjusting language to reflect a more neutral stance.
• Removing "restrictive" would not mean the ECB is done cutting—it reflects uncertainty on the neutral rate.

3️⃣ Press Conference Could Signal More Uncertainty 📢

• ECB President Lagarde may highlight divisions within the Governing Council.
• She will likely maintain the stance that rates remain restrictive, but acknowledge uncertainty about future moves.
• While it’s too soon to discuss stopping rate cuts, Lagarde may hint at a debate happening soon.

4️⃣ Hawkish Signals to Be Balanced by Open-Ended Policy Outlook ⚖️

• Some policymakers have hinted at the need to undershoot neutral rates to stimulate the economy.
• The ECB will likely acknowledge risks of inflation undershooting its target.
• Expect Lagarde to emphasize data dependence and a meeting-by-meeting approach.

Conclusion:

While the ECB is set to cut rates next week, growing divisions on communication and policy outlook could make the press conference the real market-moving event. Investors should watch for hints on whether rate cuts will continue at every meeting or if a pause is coming.