Global financial markets have sharply revised their expectations for interest rates following a late-February escalation in the Middle East, driven largely by a surge in oil prices and renewed inflation concerns.
Before the escalation, futures markets had anticipated interest rate cuts across major economies, including the United States, the eurozone and the United Kingdom. However, those expectations have now reversed, with markets increasingly pricing in potential rate increases by the Federal Reserve, the European Central Bank (ECB) and the Bank of England (BoE) later this year.
The shift reflects growing concern that higher energy costs could push up headline inflation, complicating efforts by central banks to bring price growth back to target. At one stage, markets suggested there was as much as a 75% probability that the ECB and BoE could raise rates as early as their April policy meetings.
Recent communications from policymakers have added to this reassessment. The Bank of England has signalled a readiness to act to ensure inflation returns to its 2% target, while the ECB has warned that the conflict has increased uncertainty, posing risks to both inflation and economic growth.
Despite this, central bank officials have urged caution. Bank of England Governor Andrew Bailey said it would be premature to draw firm conclusions about rate rises, while ECB policymaker Joachim Nagel advocated a “wait-and-see” approach.
In the United States, the Federal Reserve acknowledged continued uncertainty linked to developments in the Middle East, while maintaining its broader outlook. Although its projections still point to a modest rate cut in 2026, officials indicated a shift towards fewer reductions.
Analysts say the outlook remains uncertain, with central banks likely to assess not only the impact of higher energy prices on inflation, but also the broader effects on growth and financial conditions.
Meanwhile, bond markets have adjusted sharply, with yields rising on expectations of tighter policy. Some investors see opportunities in short-term US government debt, while warning that emerging market assets could face increased pressure in the near term.
