Euro sculpture on Willy Brandtplatz in the financial district of Frankfurt, Germany, March 6, 2025.
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Brokers now expect the European Central Bank to raise interest rates multiple times this year as concerns of higher inflation and lower growth put pressure on the central bank to act.
JPMorgan, Morgan Stanley and Barclays on Thursday revised their forecasts for future interest rate hikes after ECB President Christine Lagarde warned that the outlook was “highly uncertain” with inflation risks.
As expected, the ECB left its key interest rate unchanged at 2% and gave no commitment on future decisions, but analysts have taken a more hawkish tone.
Barclays and JPMorgan expect up to three rate hikes of 25 basis points each this year, with the banks expected to raise rates in April, June and July, according to Reuters. This is a notable change from the expectation that interest rates would remain unchanged in 2026, with ECB deposit rates expected to be 2.75% by the end of the year.
Morgan Stanley expects the ECB to raise rates at its June and September meetings, bringing rates to 2.5%.
Investors are looking for cues of hawkishness in policymakers’ statements. In an interview with Bloomberg News on Friday, Bundesbank President Joachim Nagel raised the possibility of a rate hike in April if the war continues and inflation returns.
“As things stand, the medium-term inflation outlook could deteriorate and inflation expectations could rise sustainably, which means a more restrained monetary policy stance will probably be needed,” Nagel told Bloomberg.
Markets are currently pricing in a roughly 50% chance that the ECB will raise interest rates in April, according to LSEG data. In the case of a rate hike in June, that probability increases to 80%.
Some are calling for calm.
Former ECB president Jean-Claude Trichet told CNBC’s Squawk Box Europe on Friday that the ECB would be “very wise” to assess all the facts and make decisions on a meeting-by-meeting basis.
He also pushed back against the idea that Europe was reaching the point of stagflation, telling CNBC that the drop in growth was not yet “drastic.”
Economists at UBS expect the ECB to keep interest rates unchanged rather than tighten policy, which is “contrary to market expectations,” they said in a note on Thursday.
After all, the main factor influencing the central bank’s decisions is the duration of the war.
“A spike in inflation will naturally act as a brake on economic growth, so it’s important that the ECB doesn’t tighten too much and remains focused on the economic outlook,” said Richard Carter, head of fixed rates research at Quilter Cheviot.
“This is of course very difficult given all the movement in the Middle East, so the outlook for interest rates is going to be very volatile going forward.”
