Barclays Drops Rate Cut Outlook as Inflation Pressures Persist
Barclays has revised its monetary policy outlook, no longer expecting the Federal Reserve to cut interest rates this year. Instead, the bank now forecasts that rates will remain unchanged through 2026, with a single 25-basis-point cut likely in March 2027.
The shift comes as elevated energy prices continue to slow progress on inflation.
Higher Oil Prices Drive Forecast Changes
Barclays analyst Marc Giannoni explained that the updated outlook reflects a new oil price baseline. The bank now expects Brent Crude Oil to peak at $115 per barrel in the current quarter before gradually declining to $100 by year-end, averaging $100 for the full year.
Meanwhile, WTI Crude Oil is projected to reach $105 per barrel in the second quarter, with an average of $93 per barrel in 2026.
Inflation Forecast Revised Higher
Barclays has increased its inflation projections, now expecting headline PCE inflation to reach 3.8% on a fourth-quarter basis in 2026, significantly higher than previous estimates. Core PCE inflation is also expected to rise to 3.1%, reflecting persistent price pressures across the economy.
These elevated inflation levels are a key reason behind the bank’s revised stance on interest rates.
Economic Growth Slows but Labor Market Holds Strong
The bank has slightly reduced its 2026 GDP growth forecast to 2.1%, down by 0.3 percentage points. However, the labor market is expected to remain resilient, limiting the need for the Federal Reserve to implement precautionary rate cuts.
According to Giannoni, inflation is likely to remain above 3% year-over-year through the end of the year, with monthly trends still running above the Fed’s comfort level.
Fed Rate Cuts Delayed Until 2027
Given the current outlook, Barclays believes the Federal Reserve will only begin cutting rates in March 2027, once there is clear evidence that inflation is moving back toward the 2% target.
Risks Remain Skewed to the Upside
Barclays also highlighted ongoing risks tied to energy markets, particularly potential disruptions in the Strait of Hormuz. Any escalation could push oil prices higher and further delay progress on inflation, reinforcing the case for a prolonged period of stable interest rates.
Market Outlook
Overall, Barclays’ updated forecast signals a more cautious outlook for monetary policy, with persistent inflation and strong labor conditions likely to keep the Federal Reserve on hold longer than previously expected.
