Major Banks Reverse Course, Now See ECB Rate Hikes Amid Geopolitical Pressure
In a significant shift in monetary policy expectations, a growing consensus among major Wall Street firms now anticipates interest rate hikes from the European Central Bank (ECB), reversing earlier predictions of a pause for the entire year. This “bandwagon” effect, as described in market commentary, follows a similar revision from JP Morgan and incorporates new forecasts from both Barclays and Morgan Stanley. The primary catalysts for this U-turn are escalating tensions in the Middle East and a corresponding uptick in energy prices, which have reignited concerns about persistent inflationary pressures in the Eurozone.
Barclays Projects Two Hikes Starting in April
Barclays economists have updated their call, now expecting the ECB to implement two rate increases in 2024. Their revised timeline places the first hike in April, followed by a second in June. This marks a clear departure from their previous stance, which aligned with the earlier market consensus of no change for the year. The bank’s analysis suggests that recent energy cost trajectories and sticky services inflation are compelling the ECB’s Governing Council to resume its tightening cycle sooner than previously anticipated to anchor inflation expectations.
Morgan Stanley Eyes Later Hikes and a Return to Cuts in 2027
Morgan Stanley’s outlook presents a slightly more delayed path for ECB tightening. Their current forecast penciled in the first rate hike for June, with a subsequent move in September. However, the firm’s long-term view shares a common endpoint with JP Morgan. “Faced with lower growth, we think the ECB will likely cut rates again in June and September 2027 to 2%, bringing rates back to neutral territory,” their report states. This implies a classic hawkish-then-dovish pivot: hikes to combat inflation followed by a prolonged easing cycle as economic activity cools.
Concurrent Revision to Bank of England (BOE) Outlook
Morgan Stanley’s reassessment extends to the Bank of England (BOE) as well. The firm has notably pushed back its expectations for UK monetary policy easing. Previously forecasting two rate cuts in 2024 (in April and November), Morgan Stanley now projects the BOE will maintain its current stance throughout 2026. This hold pattern reflects a belief that UK inflation, while moderating, will remain sufficiently stubborn to preclude any premature policy loosening, aligning with a broader theme of central banks remaining vigilant against a resurgence of price pressures.
These coordinated revisions from Barclays, Morgan Stanley, and JP Morgan underscore a rapid recalibration in high-level financial forecasting. The adjustments are directly tied to exogenous shocks in the energy complex and a reassessment of the inflation-fighting resolve required from major central banks. For investors and market participants, the evolving consensus points to a more protracted and complex interest rate cycle in both the Eurozone and the UK than was priced in just a few months prior.
