BofA-ML sees rising risk of no ECB rate hikes in 2019 because of trade wars

Economists at Bank of America-Merrill Lynch stood by their forecasts for a first hike in the ECB's deposit rate in September 2019, but said they now saw an increased risk of no interest rate hikes at all next year.

In its latest Europe Economic Weekly note, BoA-ML said its take on the European Central Bank's 2018 Forum in Sintra was that their policy was above all 'state' or data-dependent, rather than calendar dependent.

At Sintra, policymakers from the different central banks gathered there had indicated their concern about the impact that just the threat of potential trade wars might have on the economy, they said.

On the other hand, several central bank officials had confirmed BoA-ML's view that alternative measures of core inflation had been showing signs of improvement, "but remained weak".

In any case, the 'trade noise' was getting "serious", BofA-ML said.

On the investment bank's own projections, US car tariffs of 25% might subtract 0.3 percentage points from euro area GDP growth, with a 7.5% strengthening in the US dollar needed to offset that GDP loss.

If Washington raised its tariffs on European cars to 25% and placed a 10% levy on all other goods, then Eurozone GDP might take a hit worth 0.7 percentage points, it said.

To offset that, the euro would need to reach parity versus the US dollar.

BofA-ML also weighed in on the announced Franco-German plan for EU-reform agreed at Meseberg, saying that: "the 'plan' falls short of a credible and functional management tool to respond to a sovereign debt crisis. Striking a compromise across all EU members for this plan looks difficult, to us, too."