Banks eye three ECB rate hikes this year

Brokers now predict the European Central Bank will raise interest rates multiple times this year, as the specter of high inflation and low growth increases pressure on central banks to act.

JP Morgan, Morgan Stanley and Barclays revised their forecasts for future rate hikes on Thursday after ECB President Christine Lagarde warned of a “significantly more uncertain” outlook with risks to inflation.

As expected, the ECB kept interest rates at 2% and did not commit to future decisions, but analysts are taking a more hawkish tone.

Barclays and JP Morgan expect three rate hikes of 25 basis points each this year, while banks expect increases in April, June and July, Reuters reported. This is a marked departure from forecasts of unchanged interest rates for 2026 and would bring the ECB’s deposit rate to 2.75% by the end of the year.

Morgan Stanley expects the ECB to raise interest rates to 2.5% at the bank’s June and September meetings.

Investors are looking for hawkish clues in policymakers’ rhetoric. In an interview with Bloomberg News on Friday, Bundesbank President Joachim Nagel hinted at a possible interest rate increase in April if the war continues and inflation re-emerges.

“Given the current situation, the medium-term inflation outlook could worsen and inflation expectations could rise sustainably, meaning that a more restrictive monetary policy stance is likely to be necessary,” Nagel told Bloomberg.

According to LSEG data, markets are currently pricing the probability of an ECB rate hike in April at around 50%. For an increase in June, this probability increases to 80%.

Others are calling for calm.

Former ECB President Jean-Claude Trichet told CNBC’s European Early Edition on Friday that the ECB was “very smart” to make decisions on a meeting-by-meeting basis to consider all the facts.

He also disputed the idea that Europe had reached a point of stagflation, telling CNBC that the decline in growth was not yet “dramatic.”

UBS economists wrote in a note on Thursday that they expect the ECB to leave rates unchanged, instead tightening policy “contrary to market expectations.”

Ultimately, the main factor affecting the decisions of central banks is the duration of the war.

“Any increase in inflation will naturally put the brakes on economic growth, so it is important for the ECB not to tighten too much and focus on the economic outlook,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

“This is of course very difficult given such a volatile landscape in the Middle East and so the outlook for interest rates is quite uncertain from here.”