Several banks expect the European Central Bank to raise interest rates three times this year, with a former governor stating that Europe has not yet fallen into stagflation.

Key Takeaways

• JPMorgan, Morgan Stanley, and Barclays all raised their expectations on Thursday, forecasting that the European Central Bank will increase rates.
• Data from the London Stock Exchange Group shows that the market currently prices in about a 50% probability of an ECB rate hike in April.
• The Iran conflict has disrupted the economic balance in Europe, increasing the risks of slower growth and higher inflation.

As the gloom of rising inflation and slowing growth deepens—pushing central banks to take action—several brokerage firms have now predicted that the ECB will raise rates multiple times this year.

After ECB President Christine Lagarde warned that economic prospects “uncertainty has increased significantly,” and that inflation faces risks, JPMorgan, Morgan Stanley, and Barclays adjusted their expectations on Thursday, projecting further rate hikes.

As the market had expected, the ECB will keep the key interest rate unchanged at 2%, and it did not provide any clear commitment on subsequent policy, but analysts’ stance has clearly shifted to a more hawkish tone.

Barclays and JPMorgan expect the ECB to raise rates three times this year—each by 25 basis points—with timing in April, June, and July respectively. This is a sharp reversal from their prior view that rates would remain unchanged in 2026. If it materializes, the ECB’s deposit rate would rise to 2.75% by year-end.

Morgan Stanley, meanwhile, expects the ECB to hike rates at the June and September meetings, lifting the rate to 2.5%.

Investors are closely looking to policy officials’ remarks for hawkish signals. In a Bloomberg News interview on Friday, Joachim Nagel, president of the Bundesbank, said that if the conflict continues and inflation returns, the ECB does not rule out the possibility of a rate hike in April.

Nagel said: “Given the current situation, the medium-term inflation outlook could worsen, and inflation expectations could keep rising. This means monetary policy may need to shift toward a more restrictive stance.”

Data from the London Stock Exchange Group shows that the market currently prices in about a 50% probability of an ECB rate hike in April, while the probability for a June hike rises to 80%.

There are also views calling for staying calm.

Former ECB president Jean-Claude Trichet said in an interview with CNBC’s “Europe Morning Edition” on Friday that the ECB’s approach of “assessing at each meeting,” and making decisions after incorporating all the facts, is “very wise.”

He also does not agree with the claim that Europe is in a stagflation trap. To CNBC, he said that the extent to which economic growth has slowed has not yet reached a “dramatic” level.

In a research note released on Thursday, UBS economists wrote that they expect the ECB to hold steady rather than tighten policy, a judgment that is “contrary to market expectations.”

In the end, the key factor affecting central bank decisions is how long the conflict lasts.

Richard Carter, head of fixed income research at UK wealth management firm Quilter Cheviot, said: “Any surge in inflation will naturally suppress economic growth, so the ECB should by no means tighten policy excessively and should always focus on the economic outlook.”

“Of course, the situation in the Middle East can change rapidly, and it is extremely difficult to do that. That’s why the interest rate outlook is still filled with very high uncertainty.”

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