09:21 AM EST, 02/25/2025 (MT Newswires) -- UBS said it expects the European Central Bank to cut the depo rate by 25bps to 2.5% on March 6, based on new macroeconomic projections -- this decision is fully priced (-24.6bps).

However, the bigger question is how much further the ECB will cut from there, and at what pace, wrote the bank in a note to clients. Following Executive Board member Isabel Schnabel's hawkish interview last week -- she said the ECB is "getting closer to the point where we may have to pause or halt our rate cuts" -- market pricing for April has pulled back (-16bps by the time of writing th UBS note).

According to the central scenario of UBS, the ECB will continue to cut rates by 25bps each in April and June, thus bringing the depo rate to 2%, the rate the bank regards as broadly neutral. While UBS acknowledges the debate about a pause in April, the bank continues to see a high likelihood of United States tariffs on European Union imports being announced before the ECB meeting on April 17, which in its view would only strengthen the rationale for the ECB to keep on cutting rates.

Despite the potential gross domestic product upside from a ceasefire in Ukraine, UBS thinks the overall balance of risks to the eurozone economy remains skewed to the downside, given the threat of U.S. tariffs, which might well outweigh the effects of a ceasefire, at least initially.

Given heightened uncertainty, the bank estimates the ECB to maintain a data-dependent, meeting-by-meeting approach, so refusing to commit to a specific future rate path. However, UBS thinks it might drop from its statement the reference to monetary policy conditions remaining "restrictive".

In the press conference, UBS predicts a renewed focus on neutral rates -- given the ECB's paper and Schnabel's comments. Also of interest will be how the ECB judges the potential downside from U.S. tariffs and upside from a Ukraine ceasefire and a potential increase in EU fiscal spending.

UBS believes the ECB's new macro projections -- prepared by ECB staff, not national central banks -- will show lower growth in 2025 and higher inflation in 2025 and 2026. Compared with the December projections, the bank expects the assumptions for the euro to be revised lower, while natural gas and oil prices are likely to be revised up.

Specifically, the bank forecasts the ECB to raise its 2025 and 2026 inflation forecasts by 0.2pp to 2.3% and by 0.1pp to 2%, respectively, while maintaining the 2027 at 2.1%. With higher energy prices likely to be the key driver of the upward revision in headline inflation, UBS sees the core inflation projections to remain largely unchanged, at 2.3% in 2025 and 1.9% in 2026 and 2027.

As regards GDP growth, UBS estimates the 2025 projection to be cut by 0.2pp to 0.9% due to weaker than expected growth in Q4 -- revised to +0.1% quarter over quarter versus the ECB's December forecast of 0.2% quarter over quarter -- and a weaker near-term growth outlook.

The bank expects the 2026 and 2027 GDP forecasts to stay unchanged at 1.4% and 1.3%, respectively. The UBS eurozone GDP forecasts are lower, at 0.9% for 2025, 1.1% for 2026, and 1.2% for 2027.

Importantly, the ECB's and the bank's baseline projections don't include the impact of potential U.S. tariffs on the EU or a ceasefire in the Russia-Ukraine war.