ECB to continue cutting rates in second half of 2025: Barclays

Investing.com -- The European Central Bank is likely to continue cutting interest rates in the second half of 2025, according to analysts at Barclays (LON:BARC). 

Despite President Christine Lagarde’s signal that the current monetary easing cycle may be nearing its end, Barclays expects two additional 25-basis-point reductions at the ECB’s September and December meetings. This would bring the deposit facility rate down to 1.5% by year-end.

At its June meeting, the ECB lowered policy rates by 25 basis points, citing lower inflation projections. 

However, Lagarde struck a more hawkish tone than expected, stating, “We are getting to the end of the monetary policy cycle,” and dismissed inflation undershoots in 2026 as largely driven by energy prices and currency effects. 

Barclays analysts believe that, despite the rhetoric, a majority on the Governing Council will support further easing based on current economic and inflation data.

Headline inflation dropped to 1.9% year-on-year in May, below the ECB’s 2% medium-term target. Core inflation also eased, falling to 2.3% from 2.7% the previous month. 

Services inflation saw a notable decline, partly reversing holiday-related price spikes. Barclays’ inflation tracker projects headline inflation will stay below target through 2026, bottoming at 1.4% in early 2026 and settling at 1.7% later that year. This path is broadly consistent with updated ECB staff forecasts.

On the growth front, euro area GDP expanded 0.6% quarter-on-quarter in the first quarter, but this figure was inflated by a 9.7% surge in Irish GDP, which reflects multinational activity rather than domestic demand. 

Excluding Ireland, the euro area grew 0.3%. Barclays noted that the boost from U.S. firms’ front-loading purchases ahead of tariffs, which temporarily lifted exports, is already fading.

Recent data suggest a slowdown in activity. April industrial production declined across Germany, France and Spain, while factory orders in Germany rose only on the back of strength in two volatile sectors. 

Services and retail data were more stable, and the unemployment rate fell slightly in April. Still, Barclays sees overall momentum as weak.

Barclays also questioned the ECB’s baseline growth assumptions, which remain unchanged for 2025 at 0.9% and were revised only slightly downward for 2026. 

Analysts said these appear optimistic in light of persistent economic headwinds and delays in fiscal stimulus, especially in Germany, where tax reforms and infrastructure spending are expected to have more impact after 2027.

While the ECB maintains a meeting-by-meeting approach, Barclays sees sufficient evidence for continued policy easing. 

Analysts argue that the projected inflation undershoot, combined with fragile growth, supports further rate cuts even if the central bank refrains from signaling them in advance.