Lead - Bank of America has lowered its inflation forecasts for the eurozone on the back of a softer view of natural gas prices, shifting the expected headline inflation peak to roughly 3.3% in late third quarter 2026 rather than 4% in fourth quarter 2026.
Revised inflation trajectory - The bank now projects Harmonised Index of Consumer Prices (HICP) inflation at 2.9% for 2026, a downward revision of 40 basis points from its prior estimate. For 2027, the forecast is 1.9%, down 20 basis points. On the core side, Bank of America has adjusted forecasts to 2.2% in 2026 and 2.1% in 2027, each 10 basis points below its earlier view. According to the bank's timetable, headline inflation is expected to slip below 2% again in the second quarter of 2027, while core inflation would reach 2% by the end of that year.
Growth outlook - Alongside the inflation revisions, Bank of America raised its eurozone GDP projections modestly. Growth is now seen at 0.7% for 2026, up 10 basis points, and 1.2% for 2027, up 20 basis points. The bank notes that a milder gas-price profile reduces the real economic shock from the ongoing crisis by roughly one third, while cautioning that the effects of higher oil prices and ongoing uncertainty still persist. Peak growth is expected in the first half of 2027 before momentum eases toward about 0.3% quarter-over-quarter by the end of 2027.
Monetary policy outlook - Bank of America preserves its call for two European Central Bank rate hikes of 25 basis points each in June and July 2026, which would lift the deposit rate to 2.5%. The bank acknowledges rising risks that the second hike could be delayed to September 2026, but judges the odds of no hikes at all to be larger than the chances of the ECB raising policy rates by more than a cumulative 50 basis points.
Looking beyond the hiking cycle, the bank expects the ECB to begin cutting rates on a quarterly cadence starting in June 2027, reducing the deposit rate to 1.75% by the end of that year. It also notes the possibility that the central bank could hold the deposit rate at around 2% for a period until a sustained undershoot of inflation prompts cuts below 2% in 2028.
Summary of key implications
- Headline inflation peak revised lower to about 3.3% in late Q3 2026 from a prior 4% in Q4 2026.
- HICP forecasts: 2.9% in 2026 (down 40 bps) and 1.9% in 2027 (down 20 bps); core inflation at 2.2% and 2.1% respectively (each down 10 bps).
- Growth nudged up to 0.7% in 2026 and 1.2% in 2027; peak growth anticipated in H1 2027 before slowing toward ~0.3% q/q by end-2027.
Identified risks and uncertainties
- Persistently higher oil prices and broader economic uncertainty could blunt the positive effect of lower gas prices and alter the inflation or growth path.
- Timing risk around ECB policy - the second 25 basis point hike could be delayed to September 2026, introducing uncertainty to the near-term rate trajectory.
- Downside risk to the timing and magnitude of rate moves - Bank of America judges the risk of no further hikes as larger than the chance of more than 50 basis points of total tightening.
Conclusion - Bank of America has shifted to a less inflationary near-term eurozone outlook driven by a weaker gas price forecast, while slightly upgrading growth projections. The bank retains a view of modest ECB tightening next summer followed by gradual easing beginning mid-2027, while flagging several timing and price risks that could alter the path.