Morgan Stanley revised its outlook for the European Central Bank, now expecting a 25‑basis‑point increase to the deposit rate in December 2026, taking it to 2.75%, up from a prior hold view.
The bank does not anticipate a hike in the October 2026 meeting, citing insufficient evidence of runaway inflation. It projects only one rate cut in 2027, a 25‑bp reduction in December that would set the terminal deposit rate at 2.5%, down from an earlier 2.0% estimate.
Euro‑area inflation is forecast to dip below the ECB’s 2% target in November 2027, which underpins the expected policy easing. Morgan Stanley’s lead economist Jens Eisenschmidt noted that stronger‑than‑expected growth and persistent energy price pressures could keep inflation sticky.
Assuming the December hike materialises, the firm projects German 2‑year Bund yields at 3.10% and 10‑year yields at 3.40% by the end of 2026. With the deposit rate at 2.5% in 2027, yields would fall to 2.65% for 2‑year and 3.00% for 10‑year bonds.
The outlook also sees the European banking sector trading at 11–12 times earnings, up from a current 10.5‑times projection for 2027 earnings, reflecting higher‑for‑longer rates and expanding loan growth over the next two to three years.
Eisenschmidt added that if Q3 growth matches Q2 momentum and energy price pass‑through persists, the ECB would likely be “concerned about the pass‑through of the energy shock to core inflation and more likely than not to deliver another hike in December.” He also pointed to the ECB’s removal of language about “closely monitoring the situation” as a sign of a calmer near‑term outlook.
