Banks eye three ECB rate hikes this year

Brokers expect the European Central Bank to raise interest rates several times this year as fears of higher inflation and lower growth increase pressure on central banks to act.

JPMorgan, Morgan Stanley and Barclays all revised down their forecasts on Thursday to anticipate future hikes after ECB President Christine Lagarde warned of a “significantly more uncertain” outlook with inflation risks rising.

As expected, the ECB kept its key interest rate at 2% and remained non-committal on future decisions, but analysts are adopting a more hawkish tone.

Barclays and JPMorgan expect three rate hikes of 25 basis points each this year, with the banks planning rate hikes in April, June and July, Reuters reports. This is a notable change from the forecast of unchanged rates for 2026 and will bring the ECB’s deposit rate to 2.75% by the end of the year.

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

Investors are looking for clues in policymakers’ rhetoric. Bundesbank President Joachim Nagel’s interview with Bloomberg News on Friday pointed to a possible rate hike in April if the war continues and inflation reemerges.

“As things currently stand, it is conceivable that the medium-term inflation outlook may worsen and inflation expectations may rise on a sustained basis, meaning a more restrictive monetary policy stance will likely be necessary,” Nagel told Bloomberg.

According to LSEG data, markets are currently pricing in a roughly 50% chance of an ECB hike in April. For increases in June, this probability increases to 80%.

Others are calling for peace.

Former ECB President Jean-Claude Trichet told CNBC’s Europe Early Edition on Friday that the ECB is “very wise” in taking decisions on a meeting-by-meeting basis to assess the full facts.

He also disagreed with the notion that Europe is reaching the point of stagflation, telling CNBC that the decline in growth is not yet “dramatic.”

Economists at UBS expect the ECB to keep rates unchanged rather than tighten policy, which is “contrary to market expectations,” they wrote in a Thursday note.

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

“Any inflation increase will naturally act as a brake on economic growth, so it is important that the ECB does not become too tight and remains focused on the economic outlook,” said Richard Carter, head of fixed interest research at Quilter Cheviot.

“It is certainly very difficult with such a moving picture in the Middle East and thus the outlook for interest rates from here remains very high.”