Deutsche Bank expects Fed to hold rates in 2026

April 17 (Reuters) - Deutsche Bank expects the U.S. Federal Reserve to keep interest rates unchanged in 2026, citing oil-driven inflation risks linked to the Middle East war, resilient growth and a tight labour market that leave little room to cut.

The brokerage had earlier pencilled in a 25-basis-point cut in September.

Rate cuts this year would require some weakening in labor market conditions along with softer inflation, strategists at Deutsche Bank said in a note on Thursday.While brokerages such as J.P. Morgan and HSBC have ruled out any Fed rate cuts this year, peers including Goldman Sachs, Morgan Stanley and BofA Global Research still expect the central bank to lower rates twice, beginning in September.

Several Fed officials have warned in recent days that the war in the Middle East has already added to inflationary pressures, while heightened uncertainty is limiting how clearly the central bank can signal its next steps on interest rates.The Fed kept its interest-rate target range steady at its mid-March policy meeting at between 3.5% and 3.75%, while offering forecasts that penciled in one more easing at some point later this year. It next meets on April 28 to 29.

Money market pricing shows a nearly 69% probability of the Federal Reserve not cutting rates by the end of 2026, according to LSEG data."A rate hike this year is no longer a trivial possibility, but we do not expect such conditions to manifest in 2026," Deutsche Bank said.

(Reporting by Joel Jose in Bengaluru; Editing by Mrigank Dhaniwala and Janane Venkatraman)