Key facts
- Morgan Stanley forecasts two Federal Reserve rate hikes this year.
- Morgan Stanley expects the Fed to raise rates by 25 basis points at its September 15-16 meeting.
- Morgan Stanley expects a further 25-basis-point Fed hike in December.
- Morgan Stanley forecasts the ECB will increase rates by 25 basis points in December.
- Morgan Stanley cited resilient euro zone growth and higher energy prices for the ECB forecast.
- Morgan Stanley expects the Fed to signal further tightening before pausing.
Morgan Stanley has adopted a more hawkish stance on interest rates, forecasting two U.S. Federal Reserve rate increases and an additional move by the European Central Bank later this year. The bank's revised outlook comes as inflationary pressures persist and ahead of key policy decisions from the Fed and the Bank of Japan.
In a note, Morgan Stanley stated that the disinflation process has been slower than policymakers likely require. The firm now expects the Fed to implement a 25-basis-point hike at its September 15-16 meeting and another quarter-point increase in December. They also anticipate the Fed will signal further tightening before pausing as inflation moderates. The brokerage cited signs of second-round effects from energy prices, strong demand tied to AI-related investment, a potentially higher neutral rate, and concerns about credibility as reasons for the more restrictive policy stance.
For Europe, Morgan Stanley revised its forecast to include a 25-basis-point increase in December, which would lift the ECB's deposit rate to 2.75%. This reverses their previous expectation that the central bank's tightening cycle had concluded. The firm attributed this revision to resilient euro zone growth and higher energy prices. Morgan Stanley now anticipates only one rate cut in 2027, in December.