European Central Bank Holds Rates Steady as Analysts Remain Divided, Tightening Risks Emerge

Investing.com - The European Central Bank kept interest rates unchanged on Thursday, maintaining the deposit rate at 2%, as policymakers respond to the high uncertainty caused by the Middle East conflict and its impact on energy prices and inflation.

Analysts are divided on whether the central bank will need to raise rates later this year, with several major institutions revising their forecasts after this decision.

The ECB’s updated staff projections show inflation rising to 2.6% in 2026, up from the previous estimate of 1.9%, while growth forecasts have been lowered. President Christine Lagarde emphasized the ECB’s data-dependent approach, stating that the bank is “well positioned” to respond to energy shocks but ready to act if necessary.

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Below are the main analyst opinions after Thursday’s decision:

Morgan Stanley

Led by Jens Eysen-Schmidt, the team of economists now expects the ECB to raise rates twice this year, with a 25 basis point hike in June and September, bringing the deposit rate to 2.5%. They then forecast rate cuts starting from June 2027, returning to a neutral level of 2%.

Morgan Stanley cites upward revisions in inflation forecasts and the risk of persistent second-round effects as reasons for tightening policy. The bank’s rate strategy team had already closed short euro rate futures positions before the ECB’s announcement.

UBS

Chief Economist Reinhard Krause and his team maintain their baseline forecast that rates will stay at 2% throughout 2026, though they acknowledge the likelihood of this scenario is decreasing.

UBS interprets this decision as reflecting a “cautiously hawkish stance,” noting that the ECB will closely monitor commodity markets, supply bottlenecks, and wage dynamics.

The bank emphasizes that while rate hikes are not yet decided, risks lean toward tightening if energy prices remain high and second-round effects materialize.

Deutsche Bank

Chief Economist Mark Wall has revised the bank’s outlook, now expecting rates to rise to 2.5%, with hikes in June and September.

Deutsche Bank points out that President Lagarde’s calm demeanor should not be mistaken for inaction. The bank’s proprietary AI tool rated the hawkish tone of the statement at 7 out of 10, the highest since early 2024. The team stresses that this is a highly uncertain situation with risks on both sides.

JPMorgan

Rate strategist Francis Diamond and his team advise clients not to go against the market’s current pricing of rate hikes, expecting about 65 basis points of tightening by December.

The bank recommends shifting from a 2-year/10-year conditional bear flattening trade to a 1-year/2-year position, anticipating any ECB response will be front-loaded. JPMorgan believes the situation is developing toward its “long-term conflict” scenario, which assumes more persistent energy price pressures.

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