Morgan Stanley Forecasts Two Fed Hikes and ECB Rate Increase

Morgan Stanley has joined other major Wall Street banks in adopting a more hawkish outlook on interest rates. The brokerage expects the U.S. Federal Reserve to raise interest rates by 25 basis points at its September 15-16 meeting and deliver another quarter-point increase in December.

The forecasts come ahead of policy decisions from the U.S. Fed and the Bank of Japan this week, days after the European Central Bank resumed its tightening cycle. Morgan Stanley's revised ECB outlook predicts an additional 25-basis-point increase in December, lifting the deposit rate to 2.75%, reversing its previous expectation that the central bank's tightening cycle had ended.

The brokerage cited resilient euro zone growth and higher energy prices in forecasting another ECB rate hike in December. It now expects just one rate cut in 2027, in December. This development is significant as inflationary pressures persist, with recent inflation readings coming in above expectations.