PoundSterlingLIVE – File image of ECB President Christine Lagarde. Photo by Sanziana Perju / European Central Bank.
The European Central Bank (ECB) is expected to embark on a steady path of rate cuts throughout 2025, according to a new report from Barclays (LON:).
The investment bank anticipates a series of reductions aimed at stabilising inflation and supporting growth amid mounting economic headwinds.
“The direction of travel is clear,” Cena said Mariano Cena, the report’s lead author. “The ECB is focused on achieving its inflation target while addressing the broader economic challenges facing the Euro Area.”
Barclays projects that the ECB will cut its policy rate by 25 basis points (bp) at its upcoming meeting on January 30, bringing it down to 2.75%. The report foresees further consecutive 25bp cuts at each meeting in the first half of the year, culminating in a policy rate of 2.0% by June 2025.
“The Governing Council appears committed to a gradual and cautious easing cycle,” says Cena. “This approach allows the ECB to balance the risks of prolonged inflation undershooting with ongoing concerns about weakening growth across the Euro Area.”
Outright Stimulus
The report highlights a potential shift in the ECB’s stance later in the year. As inflation stabilises near the 2% target by the second quarter, Barclays expects the central bank to adopt a mildly accommodative stance.
This will likely take the form of two additional 25bp cuts in September and December, reducing the terminal deposit rate to 1.5% by year-end.
Above: Bank lending in the Eurozone plummeted when the ECB started cutting rates. The impact of lower rates is still yet to be felt in a significant manner.
“While the first half of 2025 will see the ECB focus on returning rates to neutral territory, the second half will prioritise mitigating the risk of inflation falling below target,” Cena noted. “The ECB appears comfortable with the current market pricing of this gradual easing path.”
Barclays’ report highlights several factors driving the ECB’s decision-making. Growth risks remain skewed to the downside, with slowing consumer confidence and weak domestic demand posing challenges.
Meanwhile, inflation is projected to stabilize around the 2% target on a sustainable basis by mid-year, supported by easing energy price pressures.
“The Euro Area economy faces significant headwinds, including subdued consumer spending and investment,” said Cena. “Given these dynamics, the ECB’s cautious approach is well-suited to maintaining stability without oversteering.”
Above: Expectations for ECB rates have fallen sharply since last year. The adjustment has further to run according to Barclays.
Market pricing shows investors are poised for approximately 100bp of easing for 2025, but Barclays thinks the ECB will implement six rate cuts in 2025, totalling 150bp:
Four cuts in the first half of the year: One 25 basis point (bp) cut at each meeting (January, March, April, and June), bringing the policy rate to 2.0%.
Two cuts in the second half of the year: One 25bp cut in September and another in December, resulting in a terminal deposit rate of 1.5%.
For those watching the Euro outlook, this suggests more dovish interest rate developments in the outlook.
If the Federal Reserve cuts just once, the ECB will outcut the Fed by an overwhelming margin, which is consistent with the Euro-Dollar testing parity.
An original version of this article can be viewed at Pound Sterling Live
