Morgan Stanley has abandoned its forecast for European Central Bank rate cuts in 2026, citing renewed inflationary pressures from Middle East energy turmoil. The investment bank's analysts, including Jens Eisenschmidt and Jean-Francois Ouvrard, previously expected two rate reductions this year but now see the central bank holding borrowing costs steady through 2026.

Energy prices have spiked following U.S.-Israel military actions against Iran, with oil and natural gas surging as tanker traffic backs up in the Strait of Hormuz. This vital waterway handles roughly one-fifth of global crude and liquefied natural gas flows. Europe faces particular vulnerability as a major importer of LNG through this chokepoint, potentially forcing governments to seek alternative suppliers at higher costs.

The Dutch TTF benchmark natural gas contract jumped 4.8% to 51.125 euros per megawatt hour, up from around 31 euros before Middle East tensions escalated. Morgan Stanley warns inflation will likely remain above the ECB's 2% target through year-end, though could fall below that level in 2027 if energy markets normalize quickly.