Barclays forecasts ECB rate cut amid slower growth outlook

Investing.com -- Barclays (LON:BARC) expects the European Central Bank (ECB) to move forward with a 25-basis-point rate cut at its March meeting, citing a deteriorating growth outlook and limited inflationary risks.

The adjustment would bring the deposit rate to 2.5%, as the Governing Council (GC) is likely to conclude that “the updated macro outlook necessitates a further easing of the level of policy restriction.”

Barclays anticipates that the ECB’s updated forecasts will show downward revisions to growth projections for 2025 and 2026, with GDP growth expected at 0.9% in 2025, down 0.2 percentage points from the December projection, and at 1.3% in 2026, lower by 0.1 percentage points.

“While we believe the ECB will maintain its consumption-led recovery narrative, the latest data and rising domestic and global uncertainties are likely to weigh on the growth outlook in the coming quarters,” Barclays strategists Mariano Cena and Saadalla Nadra-Yazji said in a note.

Economic activity remains weak, with the euro area’s real GDP growth at just 0.1% in Q4 2024, missing the ECB’s December forecast of 0.2%. The high-frequency indicators signal continued sluggishness, though Barclays does not foresee an imminent recession.

Meanwhile, the inflation outlook remains largely stable. Barclays expects the ECB to revise headline inflation slightly higher for 2025, at 2.2%, but keep projections for 2026 unchanged at 1.9%.

“Taking into account the latest inflation developments, updated energy prices and technical assumptions, as well as the effect of the slight downward revisions to the ECB’s growth path that we expect to be included in the projections, we believe the ECB’s March forecasts should lead to a small upward revision in the near-term inflation profile.”

Core inflation for 2025 is expected to hold at 2.3%, with a marginal upward revision for 2026 to 2.0%.

While the ECB has previously maintained that policy remains restrictive, Barclays believes the language will soften, reflecting the gradual shift toward a more accommodative stance. The central bank is likely to remain non-committal on future policy moves but keep the April meeting “live” for another possible cut.

Looking beyond March, Barclays projects a sequence of rate reductions, with 25-basis-point cuts expected at each of the ECB’s subsequent meetings until June, bringing the deposit rate to 2.0%.

The bank forecasts the easing cycle to continue in the second half of 2025, with additional cuts in September and December, leading to a terminal deposit rate of 1.5%. However, Barclays notes that a shift toward more expansionary fiscal policies, particularly in Germany, could influence the ECB’s ultimate policy path.