Morgan Stanley on Thursday revised its outlook for European Central Bank policy, saying it now expects the ECB to keep interest rates unchanged throughout 2026. The Wall Street brokerage moved the timing of two previously projected rate reductions from June and September 2026 to 2027, attributing the change to heightened inflation risks linked to the conflict in the Middle East.
The firm’s shift makes it one of the latest in the market to push out expectations for ECB easing. Last month, BofA Global Research removed its own forecast for rate cuts in 2026.
Global financial markets have reacted to concerns around the U.S.-Iran war, with traders weighing the potential for an oil supply shock, higher inflation and a more uncertain economic outlook. Oil prices have been particularly sensitive: "Oil prices surged more than 3% on Thursday, extending their rally, with Brent crude last trading at $83.81 a barrel." That rise in energy costs is central to Morgan Stanley’s reassessment.
In a note explaining the change, Morgan Stanley analysts said: "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." The brokerage added a caveat about the outlook beyond 2026, writing: "For 2027, inflation could fall again below target, but this is predicated on rapid energy market normalisation."
Even as Morgan Stanley projects inflation to ease in 2027 under its baseline, it warned that a sustained rise in energy costs could reopen debate about further tightening. The analysts noted that if elevated energy prices persist, the discussion around rate hikes could return to the table.
Market context and implications
The revised forecast carries implications for interest-rate expectations, fixed-income markets and sectors sensitive to energy costs. With policymakers now facing renewed upside risks to inflation tied to commodity markets, investors may adjust positioning across bonds, bank stocks and energy-exposed industries.
While the brokerage’s baseline delays easing until 2027, it links that timing explicitly to a normalization of energy markets, signaling that the path for monetary policy remains highly dependent on developments in oil and gas markets.