As conflict involving Iran and escalating tensions around the Strait of Hormuz approach the one‑month mark, executives from Europe’s largest banks say uncertainty for the global economy has increased—but their strategic outlook for 2026 remains broadly intact.
Speaking at Morgan Stanley’s European Financials Conference in London, bank leaders said they are closely tracking the conflict’s impact on inflation and growth. A shorter disruption ending in a few weeks would likely limit broader economic consequences, while a more prolonged event could keep energy prices elevated for an extended period, dampening both consumer and corporate sentiment.
“The message from banks has been about the resilience of their business model and a solid earnings picture,” says Alvaro Serrano, Head of European Banks Research at Morgan Stanley. “But the industry acknowledges that if the stress continues for too long, there will be more inflationary pressures, and loan growth could be weaker as some investment decisions would be delayed.”
To gauge how companies and investors are thinking about the conflict’s duration—a key variable for banks’ outlooks—Morgan Stanley polled conference attendees on March 17. Most respondents said that they expect the Strait of Hormuz to reopen in the short term:
- Within the next month: 39%
- In 2-3 months: 25%
- Disruptions to persist for the foreseeable future: 16%
- In the next 1-2 weeks: 10%
- Closer to 6 months: 10%
(Nearly 600 investors from 270 firms attended the event. Sixty‑one people responded to this poll question.)
What Bank Leaders Are Watching
In fireside chats at the London conference, bank executives highlighted several forces shaping their near‑term expectations across markets, clients and operations.
- Geopolitical Uncertainty as a New Normal: Persistent volatility amid a constantly changing geopolitical environment has become a new reality for companies and investors. Executives noted that after the Covid-19 pandemic and Russia-Ukraine conflict, banks and corporates in many other industries have practiced quickly adapting to changes in the macroeconomic environment.
- Portfolio Adjustments Underway: Banks are monitoring their concentration risk and adjusting exposures to account for potential spillover effects from the conflict.
- Client Investments Holding Steady: So far, European banks’ clients have not materially altered their investment strategies. But executives cautioned that a conflict lasting more than two months could change that, potentially affecting growth, inflation and interest‑rate expectations.
- Rising Demand for Advice: Clients are increasingly seeking banks’ guidance on risk management and operational transitions, including relocating accounts from the Middle East to other regions.
- Higher Cybersecurity Risk: Some executives underscored that geopolitical instability heightens the threat of cyberattacks, prompting firms to enhance system protections.
- Increased Refinancings: Bank executives from the UK reported an uptick in demand for mortgages as consumers accelerate refinancings amid concern that rates could rise.
- Uncertain Recession Outlook: Executives see no clear consensus on recession risk, reinforcing a wait‑and‑see mindset across markets.
Revised Interest Rate Forecasts
Rising energy prices have prompted Morgan Stanley Research to revise its outlook for eurozone interest rates. Rather than holding rates steady through 2026, the European Central Bank is now expected to raise rates twice this year—in June and September—to 2.5%, according to firm’s economists. They anticipate two cuts next year, also in June and September, which would bring the policy rate back to 2%.
For Federal Reserve policy, Morgan Stanley Research continues to forecast two 25-basis-point rate cuts this year, but now expects them later—in September and December, rather than in June and September.
Investors have begun pricing in the possibility of a Fed rate hike by year-end. On March 20, futures markets at one point implied more than a 50% probability of a rate increase in December.
