Morgan Stanley reverses its stance on interest rates, expecting the Fed to raise rates twice this year and the ECB to adjust rates again in December.

Morgan Stanley has tightened its outlook, expecting the Federal Reserve to raise interest rates by 0.25% in September and December following slower-than-expected inflation. They also project a further 0.25% increase by the ECB by the end of the year, pushing the deposit rate to 2.75%.

On September 15, 2569, at 2:14.42 PM, Reuters reported that Morgan Stanley had revised its interest rate outlook to more bearish, forecasting that the U.S. Federal Reserve (Fed) will raise interest rates twice this year, while the European Central Bank (ECB) is likely to raise rates again in December, amid persistently high inflationary pressures.

This revised forecast brings Morgan Stanley along with other major Wall Street banks that are adopting a more bearish monetary policy stance ahead of this week's Federal Reserve and Bank of Japan (BOJ) policy meetings, following the ECB's recent resumption of interest rate hikes.

Morgan Stanley expects the Federal Reserve to raise interest rates by 0.25% at its September 15-16 meeting and by another 0.25% in December, following higher-than-expected US inflation data.

Morgan Stanley noted that the inflation easing process is slower and less reliable than the level policymakers desire, leading them to revise their forecast to two interest rate hikes this year. They also anticipate the Fed will signal the possibility of further tightening monetary policy before halting rate increases once inflationary pressures ease.

This financial institution believes that while there are rationales for both raising and maintaining interest rates, the risks from a second-round impact on energy prices, strong demand for AI investments, a potentially temporarily higher neutral interest rate, and concerns about policy credibility all support a tighter policy stance from the Fed.

Kevin Warsh, who took over as Fed chairman in May, continues to avoid giving clear signals about the direction of interest rates. However, inflation remaining above the target, coupled with oil prices trading above $100 per barrel, and financial markets heavily weighting the possibility of a rate hike, have led investors to anticipate that this week's meeting could lead to the first rate hike since Warsh took office.

Meanwhile, Morgan Stanley revised its forecast for the ECB's interest rate outlook, now projecting a further 0.25% rate hike in December, bringing the deposit rate to 2.75%, a shift from its previous forecast that the ECB's interest rate hike cycle had ended.

Morgan Stanley argues that the resilient eurozone economy, coupled with higher energy prices, means the ECB is likely to need to raise interest rates further. Currently, they project the ECB to cut rates only once in 2570, with that cut expected to occur in December.

Reference: www.reuters.com

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