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Investing.com - The European Central Bank (ECB) has successfully implemented full passive quantitative tightening (QT) since the beginning of 2025, with the euro money market remaining stable throughout the process, according to a new Bank of America (BofA) report.
BofA forecasts the Eurosystem’s balance sheet will decrease from €6.4 trillion at the end of 2024 to €6.0 trillion by the end of 2025, continuing its decline to €5.8 trillion by the end of 2026 and €5.6 trillion by the end of 2027.
Excess liquidity is projected to follow a similar downward trajectory, falling from €2.8 trillion at the end of 2024 to €2.5 trillion by the end of 2025, then to €2.3 trillion and €2.1 trillion by the end of 2026 and 2027, respectively.
The continued balance sheet reduction is expected to widen front-end euro spreads as reserves structurally decline, affecting the euro short-term rate (€str)-deposit facility rate, Euro interbank offered rate (Euribor)-€str, and repo-€str spreads.
BofA maintains its position on forward starting Euribor-€str wideners and expects a structural tightening trend on the EUR FX-secured overnight financing rate basis due to divergent QT paths between the Federal Reserve and the ECB, while noting potential near-term widening risks related to USD funding into year-end.
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