Morgan Stanley Adjusts ECB Rate Forecast Amid Middle East Conflict

Morgan Stanley's interest rate strategists, Luca Salford and Maria Chiara Russo, have revised their forecast for the European Central Bank (ECB) due to ongoing Middle East conflicts, limited buffer zone visibility, and initial central bank analyses of a stagflation environment. According to Jin10, the strategists now anticipate the ECB will implement two 50 basis point rate hikes in June and September 2026, while retracting expectations for rate increases in 2027. LSEG data indicates that financial markets currently expect the ECB to raise rates three times this year. Additionally, the strategists project that under their baseline scenario for the ECB's rate path, the yield on 10-year German government bonds will be 2.80% by the end of 2026 and 2.70% in 2027.