JP Morgan has significantly altered its forecast for the European Central Bank (ECB), now predicting two interest rate hikes in 2026.
This new call points to two 25-basis-point increases, one in April and another in July, which would lift the ECB's deposit rate from 2.00% to 2.50%. This marks a decisive shift from the previous consensus that rates would remain on hold throughout the year. It also represents a more aggressive timeline than other analysts had anticipated, reflecting a rapidly changing economic landscape.
So, what's driving this change? The primary catalyst is a sudden energy price shock. Escalating conflict in the Middle East in early March caused European natural gas (TTF) and Brent crude oil prices to spike. Compounding the issue, Europe's gas storage levels were noticeably lower than the previous year, making the region more vulnerable to supply disruptions. This combination of factors adds significant near-term risk to the inflation outlook.
The second key factor is the persistence of sticky services inflation. While headline inflation has been moderating, the prices for services have remained stubbornly high, running well above the ECB's 2% target. Wage growth, a major driver of services costs, is also a key concern. Although wage increases are expected to moderate, recent data and upcoming public-sector adjustments in 2026 suggest that this component of inflation will not cool down easily, keeping underlying price pressures strong.
Finally, the market itself has paved the way for this forecast. Following the energy shock and the ECB's own cautious statements in March, money markets rapidly repriced the odds of a 2026 rate hike. The ECB's messaging, which highlighted a "significantly more uncertain" outlook, kept a tightening bias alive. JP Morgan's call aligns with this swift change in market sentiment, which now views the ECB's stable rate as potentially 'behind the curve' rather than simply 'on hold'. In essence, the confluence of these pressures has created a compelling narrative of "re-acceleration risk," prompting a major rethink of the ECB's policy path for 2026.
- HICP (Harmonised Index of Consumer Prices): A measure of inflation across the Eurozone, used by the ECB to guide its monetary policy.
- TTF (Title Transfer Facility): The benchmark price for natural gas in Europe.
- Hawkish: A term describing a monetary policy stance that favors higher interest rates to control inflation.