JPMorgan Chase, Morgan Stanley, and Barclays now anticipate that the European Central Bank will raise interest rates in 2026, a significant shift from their previous forecasts which expected rates to remain unchanged. This revision comes after policymakers highlighted that the conflict in the Middle East could intensify inflationary risks. Barclays and JPMorgan project that the ECB will implement a rate hike at its policy meeting in April, followed by further increases in June and July. Morgan Stanley, on the other hand, expects the ECB to raise rates by 25 basis points each in June and September. The European Central Bank held its benchmark interest rate steady at 2% on Thursday. However, due to concerns that the conflict involving Iran could drive up inflation within the eurozone, policymakers are expected to deliberate on raising rates in the coming months. Officials have expressed significant concern about the potential for a "second-round effect," where soaring energy costs could spill over into wage agreements and broader service sector prices, thereby entrenching inflationary pressures across the euro area. Reflecting this risk-off sentiment, the ECB also downgraded its 2026 economic growth forecast for the eurozone from 1.2% to 0.9%, indicating the dual impact of high inflation and geopolitical risks on the economic recovery. Regarding the timing of future rate hikes, a technical divergence persists within the ECB. While some hawkish officials support decisive action at the meeting scheduled for April 29-30, others advocate for a more cautious approach, arguing that a decision might be postponed until June when more comprehensive economic indicators are available, as the April meeting will lack new official quarterly projections.
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