The 25 basis-point move is fully priced, so market reaction will turn almost entirely on the tone of the accompanying statement and updated staff forecasts. Any signal of a more aggressive near-term path beyond the anticipated Q3 follow-up hike would likely push eurozone yields higher and support the euro. The Morgan Stanley view that fiscal support is considerably weaker than during the 2022 energy crisis is a significant constraint, suggesting the ECB cannot rely on government spending to cushion the inflation shock and may need to do more of the heavy lifting itself. Updated GDP and inflation projections will be parsed closely for how far the bank has revised its growth outlook downward.
—
The ECB is expected to raise its deposit rate by 25 basis points to 2.25% on Thursday, with focus on guidance for further hikes as oil-driven inflation risks persist.
Summary:
- The ECB is widely expected to raise its deposit rate by 25 basis points on Thursday, bringing it to 2.25%, in response to inflationary pressure from higher oil prices linked to the Middle East conflict
- Morgan Stanley analysts frame the move primarily as a pre-emptive step to prevent inflation expectations from becoming unanchored, rather than a response to confirmed second-round effects
- The policy statement’s data-dependent, meeting-by-meeting language is expected to remain unchanged, with the ECB keeping all options open and stressing uncertainty and vigilance
- Morgan Stanley anticipates a further 25 basis-point hike in the third quarter, followed by a policy reversal in 2027
- Analysts flag that the fiscal backdrop is materially less supportive than during the 2022 energy crisis, limiting the role of government spending in amplifying or cushioning inflation
- New ECB staff forecasts on inflation and GDP will be released alongside the decision
The European Central Bank is set to raise interest rates by 25 basis points on Thursday, a move that is fully priced by markets and will lift the eurozone deposit rate to 2.25%, as policymakers respond to inflationary pressure flowing from higher oil prices tied to the ongoing Middle East conflict.
With the outcome largely settled, attention will centre on the ECB’s forward guidance and a fresh set of staff projections on inflation and growth. Analysts at Morgan Stanley expect the bank’s policy statement to retain its established data-dependent, meeting-by-meeting framing, with the Governing Council signalling readiness to act while keeping its options open amid elevated uncertainty.
The Morgan Stanley team characterises Thursday’s move as primarily precautionary, aimed at anchoring inflation expectations before second-round effects can take hold, rather than as a direct response to effects already visible in the data.
Looking further ahead, analysts widely anticipate an additional quarter-point increase in the third quarter, with a policy reversal expected to follow in 2027. A notable constraint on the outlook is the fiscal environment. Unlike the 2022 energy crisis, when government spending provided a significant buffer, the current backdrop offers considerably less fiscal support, leaving monetary policy with less room to share the burden.
