Gavekal Research analysts said in a note Tuesday that the trajectory looks unclear beyond an initial round of rate cuts in Europe.
In Western Europe, the rate-cutting train is "pulling out of the station," said the firm, noting that the Swiss National Bank and the Swedish Riksbank have already begun to cut, while the European Central Bank is all but certain to start cutting rates at its June 6 meeting.
In addition, even the United Kingdom's hotter-than-expected April inflation print is unlikely to stop the Bank of England from getting on board at its August 1 meeting once the election is in the rear-view mirror.
However, looking beyond those cuts, the path is uncertain. Analysts state that while the pronounced disinflationary trend of the last 18 months means central banks will be comfortable cutting -50bp to -75bp by the end of 2024, "their course beyond that will depend on the outlook for inflation into 2025 and how they choose to react to this developing outlook."
There are three broad scenarios for Western European inflation into 2025, said the firm. These are:
- A central scenario where inflation gradually moderates to stabilize around central banks' 2% target. This is the scenario currently indicated by central bank forecasts.
- A downside scenario where inflation falls significantly below target, threatening a return to the pre-pandemic deflationary environment.
- And an upside scenario where inflation remains stuck above the central bank's 2% target.
"The downside scenario looks unlikely. This is partly because short-term cyclical dynamics point to an economic acceleration, not a slump into a deflationary recessionary spiral," writes the firm.
"But it is also because the structural domestic deflationary forces that prevailed in the 2010s are no longer in place," they add. "Inflation in Europe is therefore likely to settle at a higher level than in the past decade."