Morgan Stanley joins Wall Street banks forecasting ECB December rate hike

A growing chorus of major banks is now forecasting that the European Central Bank will raise interest rates again in December, with several institutions warning that the tightening cycle could extend well into 2027 — a sharp shift from expectations just weeks ago that the ECB's hiking campaign had peaked.

Wall Street Converges on December Hike

Commerzbank revised its ECB forecast following the central bank's September 10 decision to raise the deposit rate by 25 basis points to 2.50%, saying it "now expect[s] a 25-basis-point key rate hike at the December meeting," which would bring the deposit rate to 2.75%. Economists at the German bank cited "persistently high inflation, particularly core inflation" and said they "no longer anticipate rate cuts in 2027".fxstreet+2

The revision places Commerzbank alongside Goldman Sachs's ↗ 4.67%, Citi's Citigroup Inc. ↗ 2.45%, and Barclays's ↗ 3.85% forecasts for another rate increase in December. On Tuesday, Morgan Stanley ↗ 3.12% also joined the hawkish camp, reversing its previous expectation that the tightening cycle had ended and now forecasting a December hike to 2.75%, according to Reuters.reuters+1

LSEG data places the odds of a December quarter-point hike at 94%, while Citi expects the tightening cycle to potentially stretch into March 2027. Morgan Stanley now expects just one rate cut in 2027, in December.fxstreet+1

Persistent Inflation Drives the Shift

The ECB's September meeting set the stage for the revised outlooks. Updated staff projections showed headline inflation averaging 3% in 2026 and 2.5% in 2027, with both the 2027 and 2028 forecasts revised higher from June. Core inflation, which excludes energy and food, is expected to average 2.6% in 2027 — well above the ECB's 2% target.global.morningstar+1

ECB President Christine Lagarde struck a hawkish tone at the September press conference, citing resilient consumption, public investment, and a recovery in services, while warning that energy shocks from the ongoing Middle East conflict continue to generate inflation pressures.fxstreet+2

Markets Eye a Busy Week

The revised rate expectations arrive during a pivotal week for global monetary policy, with the U.S. Federal Reserve and the Bank of Japan both set to announce decisions in the coming days. Meanwhile, ZEW Survey data released Tuesday showed Germany's economic expectations ticking up slightly to 34.7 points, while the assessment of the current situation improved markedly.zew+1

The ECB's next meetings are scheduled for October 29 and December 17, with markets now firmly pricing in action at the latter.global.morningstar