Barclays expects the European Central Bank (ECB) to cut interest rates by 25 basis points at its March meeting, amid a weakening growth outlook and limited inflation risks.
The move would lower the deposit rate to 2.5%, as the ECB Governing Council is likely to conclude that “the updated macroeconomic projections call for further easing of policy constraints”.
According to Barclays, the ECB’s updated economic projections will show downward revisions to economic growth for 2025 and 2026. Gross Domestic Product (GDP) is expected to grow by 0.9% in 2025 (down 0.2 percentage points from the December forecast) and 1.3% in 2026 (down 0.1 percentage points).
Economic activity in the eurozone remains weak, with real GDP growth of just 0.1% in the fourth quarter of 2024, below the ECB’s December forecast of 0.2%. High-frequency economic indicators continue to point to a slowdown, although Barclays does not expect a recession in the near term.
Meanwhile, the inflation outlook remains stable. Barclays expects the ECB to revise headline inflation slightly higher for 2025 to 2.2%, but maintains its forecast for 2026 at 1.9%.
For core inflation, Barclays expects 2.3% in 2025, with a slight increase to 2.0% in 2026.
While the ECB has previously stressed that its monetary policy remains tight, Barclays believes its tone will shift to a more accommodative one, reflecting a gradual shift to a more accommodative policy. However, the central bank is expected to remain non-committal on its next steps, but the April meeting will remain the focus for potential further rate cuts.
After March, Barclays expects a series of interest rate cuts to continue, with 25 basis points cuts at each ECB meeting until June, which will bring the deposit rate down to 2.0%.
The bank also predicts the monetary easing cycle will continue into the second half of 2025, with additional rate cuts expected in September and December, bringing the terminal deposit rate to 1.5%.
However, Barclays warns that any shift towards more expansionary fiscal policy, particularly in Germany, could influence the ECB's policy direction going forward.
