Frankfurt, Germany – European Central Bank (ECB) policymakers are increasingly signaling a potential shift in monetary policy, with several major financial institutions now forecasting multiple interest rate hikes this year. The change in outlook follows warnings from ECB President Christine Lagarde regarding a “significantly more uncertain” economic environment and heightened risks to inflation.
The ECB held its key interest rates steady at its most recent meeting, maintaining the main refinancing operations rate at 2%. However, analysts at J.P. Morgan, Morgan Stanley, and Barclays have all revised their forecasts, anticipating future increases. Barclays and J.P. Morgan now predict as many as three 25-basis-point rate hikes throughout the year, potentially occurring in April, June, and July. This represents a substantial departure from earlier expectations of unchanged rates for 2026, and would raise the ECB’s deposit rate to 2.75% by the end of the year.
Morgan Stanley anticipates ECB rate hikes at the June and September meetings, bringing the rate to 2.5%. Market participants are closely scrutinizing statements from ECB officials for further indications of a hawkish turn. Bundesbank President Joachim Nagel indicated in a recent interview that a rate hike as early as April is possible if the ongoing conflict in the Middle East continues to fuel inflationary pressures. “As things currently stand, it is conceivable that the medium-term inflation outlook could deteriorate and inflation expectations could rise on a sustained basis, meaning that a more restrictive monetary policy stance would probably be necessary,” Nagel stated.
Market pricing reflects growing expectations of tighter monetary policy. LSEG data shows a roughly 50% probability of an ECB hike in April, rising to 80% for a move in June.
Not all observers agree with the prospect of imminent rate increases. Former ECB President Jean-Claude Trichet cautioned against premature action, emphasizing the importance of a data-dependent approach. He argued that the ECB is “very wise” to assess the situation meeting-by-meeting, and dismissed concerns about a slide into stagflation, asserting that the current slowdown in growth is not “dramatic.”
UBS economists, conversely, expect the ECB to maintain its current interest rate stance, a position they describe as “contrary to market expectations.”
The duration of the conflict remains a key factor influencing central bank decisions. Richard Carter, head of fixed interest research at Quilter Cheviot, noted that any surge in inflation would likely dampen economic growth, and stressed the need for the ECB to avoid overtightening. “This is of course very difficult with such a moving picture in the Middle East and thus the outlook for interest rates is very much up in the air from here,” Carter said.
The ECB is also continuing preparations for the launch of a digital euro, targeting a 2029 implementation date. Preparatory work is ongoing, despite the current focus on monetary policy adjustments.
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