The ECB has achieved a soft landing - so why is no one talking about it?

Investing.com -- The European Central Bank has managed what is often considered the most elusive goal in monetary policy: a soft landing, said analysts at BCA Research in a note dated Monday. 

Inflation has returned to target, unemployment remains low, and growth has stabilized, yet the achievement has gone largely unnoticed.

After consumer price inflation peaked at 10.6% in October 2022, the ECB began raising rates in July that year, ending eight years of negative policy rates. 

Over 15 months, it lifted borrowing costs by 450 basis points before cutting rates for the first time in June 2024, ahead of many of its peers. 

The deposit rate now stands at 2%. By tightening and then gradually easing, the bank brought inflation down without triggering a recession or rising joblessness, according to BCA Research.

Headline inflation has been at the ECB’s 2% target for four straight months. Inflation expectations are also well anchored, a sign that markets and households remain confident in price stability. 

Real wages, which had turned negative, recovered to a 3.6% peak last year before easing, suggesting the feared wage-price spiral has been avoided.

Economic activity, which came close to recession in early 2024, has steadied. Eurozone GDP grew 0.1% on the quarter and 1.4% on the year in the second quarter, with credit flows and corporate investment picking up. While Germany remains in a technical recession, the wider bloc is showing resilience.

The labor market is another point of strength. The unemployment rate across the euro area is 6.3%, near historic lows, with structural joblessness declining in countries such as France, Italy and Spain. Employment growth has slowed but is still positive.

Unlike in the UK, Sweden, Norway and Canada, all of which slipped into mild recessions following aggressive rate hikes,  Europe’s equity markets and currency have held firm. 

Stocks have hit record highs, and the euro has climbed to its strongest level in four years against the dollar.

Inflation is back at target, and nothing broke within the economy, ECB President Christine Lagarde said in July, describing the central bank’s policy stance as being in a good place.

Markets expect little additional easing going ahead. Pricing in the euro short-term rate suggests less than one 25-basis-point cut over the next year, while a modest rise in inflation to 2.1% in August has pushed expectations for the next cut out to 2026.

Successful soft landings in modern monetary history are rare. The U.S. Federal Reserve’s 1994 tightening cycle is often cited as the only example, though some economists dispute that description. 

By comparison, the ECB’s current outcome stands out as a clear case of inflation returning to target without an economic downturn.

Yet the accomplishment has not drawn widespread recognition. For investors, analysts at BCA Research say the implications are clear, with little room for further easing, government bonds should be underweighted in favor of equities.