European Rate Hike Bets Rise on Hawkish Central Banks, Oil Surge

Investors intensified bets on interest-rate increases in Europe on March 19. The shift followed a sharp rise in oil prices and a major escalation in Middle East hostilities.

Market reaction

Trading floors reacted quickly to the geopolitical shock. Two-year bond yields climbed sharply across major markets.

In the United Kingdom, two-year yields rose by more than 30 basis points. That marked the largest single-day jump since the fallout from Liz Truss’s 2022 economic plan.

Yields in the euro zone and the United States increased by about 15 basis points. The moves reflected rising expectations for faster tightening.

Central banks and policy bets

The Bank of England held its policy rate. Policymakers voted unanimously to keep rates on hold, surprising markets that had expected a split vote.

Traders now price in two BoE rate hikes this year. There is also a meaningful chance of a third hike by year-end.

Expectations for the European Central Bank shifted too. Markets fully price two ECB rate rises and place better than a 50% probability on a third move by December.

From cuts to hikes

Before the war, many had expected a rate cut this year. That view has been abandoned after recent events and central bank signals.

The U.S. Federal Reserve’s hawkish turn earlier in the week accelerated the shift. Traders largely dropped bets on any cut this year.

Energy shock and geopolitics

Oil surged amid the conflict. Prices climbed to about $119 a barrel after Iran struck energy facilities following Israel’s attack on the South Pars gas field.

Market participants said the oil surge increased pressure on central banks. Higher and persistent energy costs make further tightening more likely.

European rate-hike bets have strengthened as hawkish central banks respond to the oil surge and lingering inflation risks.

Analyst perspectives

David Rees, head of global economics at Schroders, warned markets had been positioned for a brief shock. He said a prolonged price rise would inflict broader market pain.

Rees and other analysts expect a similar cautious but hawkish tone from the ECB at its upcoming decision.

The European Central Bank was scheduled to announce its interest rate decision at 1315 GMT. Market participants will watch for language that confirms the new pricing environment.

Reporting by Filmogaz.com.