LONDON: A flurry of investment banks raised their forecasts for where euro zone interest rates will peak, after the European Central Bank signalled on Thursday that hikes were far from done.

Morgan Stanley and JPMorgan now expect ECB rates to peak at 3.25%, from 2.5% previously. Goldman Sachs and Deutsche Bank also expect a 3.25% peak, but from 3% previously.

Societe Generale expects an even more aggressive hiking path, predicting euro zone interest rates will go to 3.75%, from 3% previously.

The ECB after its policy meeting on Thursday stressed significant tightening remained ahead to curtail runaway inflation, even as it slowed the pace of rate hikes to 50 basis points from 75 bps at its previous two meetings. President Christine Lagarde suggested 50 basis point hikes could follow for several meetings.

Official projections are for average inflation to reach 8.4% in 2022 before decreasing to 6.3% in 2023, and to remain above the ECB’s 2% target through 2025.

As a result, to secure a majority for Thursday’s rate decision Lagarde had to offer dissenters arguing for a 75 bps hike a pledge that rates will be increased again, potentially as many as three times by 50 bps each, sources told Reuters.

Morgan Stanley analysts said they were revising their expectations because “the commentary from the (ECB’s) Governing Council indicate it is increasingly uncomfortable with the expected pace of the fall in inflation, which is perceived as too slow.” They said another reason was the ECB’s upbeat assessment of the medium-term growth outlook.

Investment banks ramped up their forecasts alongside money markets. Traders now price in ECB rates peaking at around 3.2%in September, up from around 2.8% on Thursday before the ECB policy meeting.

Germany’s 10-year government bond yield, the benchmark of the euro zone, reached 2.208% on Friday, up nearly 30 basis from Thursday’s intraday low ahead of the meeting.

Southern European bonds sold off even more sharply and Italy’s 10 year bond yield hit 4.417% on Friday, on track for over a 50 basis point weekly rise, which would be its most since March 2020.