morgan stanley: Morgan Stanley, others now forecast 4% peak for key ECB rate

Morgan Stanley and three other investment banks have revised their forecasts for the European Central Bank’s terminal rate – the level at which its key interest rate will peak – to 4% as inflationary pressures weigh.

Data this week showed a surprise surge in underlying inflation across the 20-nation euro zone.

The revisions also come on the heels of remarks by ECB governing council member and Belgian national bank governor Pierre Wunsch on Friday that the ECB could consider raising its key interest rate to as high as 4% if underlying inflation remains persistently high.

BofA Global Research, BNP Paribas and Barclays joined Morgan Stanley in the upward revisions. Morgan Stanley and BNP Paribas had previously seen the terminal rate at 3.25%. Barclays and BofA had expected it to peak at 3.5%.

The ECB has raised rates to 2.5% from a record low of -0.5% in July 2022.

Barclays said in a note to clients that it expects 50 basis point rate increases in March and May, and 25 basis point rises in June and July.

“We could be dealing with six more weeks of extreme data dependence, contradictory central bank speak and plenty of volatility,” BofA economists warned in a note. JP Morgan this week raised its forecast for the terminal rate to 3.75% from 3.50%

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