Morgan Stanley Sees ECB Hike in December as Inflation Concerns Mount

Morgan Stanley has revised its forecast for the European Central Bank (ECB), now expecting a rate hike in December 2026. The deposit rate is expected to increase by 25 basis points, bringing it to 2.75%. This change follows a revision to their euro area growth and inflation forecasts.

The economists led by Jens Eisenschmidt noted that euro area growth has been better than expected, and recent increases in oil and gas prices mean inflation will be more persistent. They expect the indirect effects of higher energy prices to show up in inflation data between now and December, given a typical six-to-nine-month lag.

The team believes the ECB will be concerned about the pass-through of the energy shock to core inflation and is more likely than not to deliver another hike in December. Morgan Stanley does not expect a hike in October, citing that the central bank wants more data before acting and that 'a real smoking gun for runaway inflation is missing.'