Morgan Stanley sees no more ECB easing in 2026 as mideast crisis lifts inflation risks

Morgan Stanley Expects ECB to Keep Interest Rates Steady Through 2026

Morgan Stanley's Revised Forecast and Market Implications

March 5 (Reuters) - Morgan Stanley on Thursday became the latest Wall Street brokerage to forecast that the European Central Bank will keep interest rates steady through 2026, citing potential inflation risks due to the conflict in the Middle East.

Changes in Rate Cut Expectations

The Wall Street brokerage had previously anticipated two ECB rate cuts in June and September, but now expects the central bank to deliver those reductions in 2027 instead. Last month, BofA Global Research removed its forecast for rate cuts in 2026.

Impact of Global Events on Financial Markets

Global financial markets have been reeling as the U.S.- Iran war has stoked fears of an oil supply shock, elevated inflation and an uncertain economic outlook.

Energy Prices and Inflation Outlook

"Given the recent increase in energy prices, euro area inflation will likely be back above the ECB's target for the remainder of this year," Morgan Stanley analysts said in a note.

Oil prices surged more than 3% on Thursday, extending their rally, with Brent crude last trading at $83.81 a barrel.

"For 2027, inflation could fall again below target, but this is predicated on rapid energy market normalisation," the analysts added.

Potential for Future Rate Hikes

Although the brokerage expects inflation to fall in 2027, a persistent rise in energy prices could bring the discussion around rate hikes back to the table.

(Reporting by Kanchana Chakravarty in Bengaluru; Editing by Sonia Cheema)