Deutsche Bank turns more hawkish on the ECB, arguing that energy-driven inflation risks now outweigh growth concerns, though the policy outlook remains highly uncertain.
Summary:
- Deutsche Bank shifts ECB call in response to Middle East conflict
- Now expects ECB to hike rates to 2.50% in 2026
- Two 25bp hikes seen in June and September
- Energy shock driving inflation back above 3%
- Growth outlook deteriorating, with recession risk rising
- Inflation expected to be initially transitory but risks becoming persistent
- Policy path highly contingent on energy prices and geopolitics
- Risks skewed both ways: no hikes or more aggressive tightening possible
Deutsche Bank has revised its European Central Bank (ECB) outlook, warning that the Middle East conflict has materially altered the inflation trajectory and forced a shift toward a more hawkish policy stance despite rising risks to growth.
In its latest note, the bank said it now expects the ECB to raise interest rates to 2.50% in 2026, compared with its previous forecast that rates would remain on hold at 2% through next year before tightening began in 2027. The revision reflects a sharp reassessment of inflation dynamics following the surge in energy prices linked to the escalating geopolitical الأزمة.
Analysts at Deutsche Bank noted that, prior to the conflict, risks around their ECB call had been tilted to the downside, with a more dovish policy path increasingly likely. However, the energy shock has changed the outlook significantly, with current price levels and forward curves suggesting inflation could quickly rise above 3% in the coming months and remain elevated through the rest of the year.
While the bank expects this inflation spike to be largely transitory, it warned that the key risk lies in persistence — particularly if higher energy costs begin to feed more broadly into the economy. This creates a challenging policy environment for the ECB, which must balance rising inflation against weakening growth.
The growth outlook has deteriorated in parallel, with Deutsche Bank flagging downside risks and a “real” possibility of recession this year. Despite this, the bank argues that a modest tightening cycle would be an appropriate response to anchor inflation expectations without significantly worsening the economic slowdown.
Under its revised baseline, Deutsche Bank expects the ECB to deliver two 25 basis point rate hikes, likely in June and September, bringing the deposit rate to 2.50% — the upper end of estimates for neutral policy. Such a move would signal the central bank’s commitment to price stability while avoiding a shift into clearly restrictive territory.
However, the bank stressed that uncertainty remains exceptionally high, with the policy path highly dependent on the evolution of energy prices and the broader geopolitical situation. If tensions ease quickly, the ECB could opt to keep rates unchanged. Conversely, a more prolonged or severe disruption to energy supply could force policymakers to move beyond neutral and into more restrictive settings.
