Morgan Stanley Sees ECB Rate Hike in December as Euro Area Growth Surprises

Morgan Stanley has revised its forecast for the European Central Bank (ECB), predicting a rate hike in December 2026. The bank's economists, led by Jens Eisenschmidt, expect the deposit rate to increase by 25 basis points to 2.75%, up from their previous view of holding steady.

The revision follows an update to the team's euro area growth and inflation forecasts. They note that euro area growth has been stronger than expected, and recent increases in oil and gas prices have led to higher inflation, which is likely to persist for longer.

Morgan Stanley does not expect a rate hike in October, as they believe the ECB will want more data before making a decision. However, the team anticipates that the bank's concerns about core inflation will lead them to raise interest rates in December.

In the long term, Morgan Stanley forecasts only one rate cut in 2027, which would lower the terminal rate to 2.5%. They also predict that euro area inflation will fall below the ECB's target in November 2027, at which point they expect the central bank to loosen policy.