The escalation of conflicts in the Middle East has triggered a surge in energy prices, reigniting concerns over a potential interest rate hike by the European Central Bank! Nagel warned that if inflation expectations continue to deteriorate, a rate increase in April will become inevitable.
Economists are increasingly aligning with the market consensus that interest rate hikes by the European Central Bank within months have become inevitable.
The escalation of conflicts in the Middle East, combined with hawkish comments from ECB policymakers on Thursday, prompted analysts at JPMorgan, Morgan Stanley, and Deutsche Bank to revise their forecasts for borrowing costs in the Eurozone. JPMorgan now expects rate hikes in April and July, while the other two institutions predict a slightly delayed response, with increases likely occurring in June and September.
Economists at Deutsche Bank, led by Mark Wall, stated in a report: 'To manage risks, we now expect the ECB to raise rates to 2.5%, the upper bound of the neutral rate range. This would signal a commitment to price stability without imposing significant costs on economic growth.'
Although the ECB kept interest rates unchanged for the sixth consecutive meeting this week, officials are prepared to raise borrowing costs on April 30 if the consequences of the conflict push inflation significantly above target, according to sources familiar with the matter who spoke to Bloomberg on Thursday.
This aligns with the view of Bundesbank President Joachim Nagel, who said in an interview published on Friday that policymakers may need to consider raising rates as early as next month if Iran-related conflicts lead to further price pressures.
“Given the current situation, the medium-term inflation outlook could deteriorate, and inflation expectations may continue to rise. This means adopting a more restrictive monetary policy stance might be necessary.” The Bundesbank president added that more reliable data relevant to this issue will likely be available at the next ECB Governing Council meeting in six weeks.
Money markets are currently pricing in two 25-basis-point rate hikes by the ECB this year, with the first potentially occurring as early as April. According to swap pricing, there is more than a 50% probability of a third hike before the end of the year.
Both JPMorgan and Morgan Stanley believe that the ECB will eventually reverse this move. Economists at Morgan Stanley, led by Jens Eisenschmidt, noted in a report: 'Facing lower economic growth, we believe the ECB may cut rates back to 2% in June and September 2027, returning rates to a neutral level.'
Meanwhile, Greg Fuzesi of JPMorgan currently predicts only one rate cut in 2027. He wrote: 'We also believe that once the risks associated with second-round effects have passed, the ECB will have justification to reverse its tightening policy.'
Editor/Doris