Gold and Silver Flash Crash! Global Central Bank Rate Hike Expectations Heat Up Sharply

On the evening of March 19, spot gold and silver experienced a panic “sell-off”! Silver plunged as much as 12%, and gold dropped over 5%.

In the news, expectations for global central bank rate hikes have sharply increased.

The Bank of England stated it is “ready to act at any time” to address inflation surges triggered by the Middle East conflict. This statement prompted traders to increase bets, with expectations of a rate hike as early as next month.

The nine-member Monetary Policy Committee (MPC) unanimously voted on Thursday to keep interest rates unchanged at 3.75%—the first decision without dissent in four and a half years.

Minutes from the meeting showed a significant shift in policy tone. The current conflict has disrupted production in the world’s most important oil-producing region and hindered tankers passing through the crucial Strait of Hormuz.

Policy makers have opened the door to rate hikes. Governor Andrew Bailey warned that policies must “address the risk of more persistent effects of UK CPI inflation.” He also added, “Whatever happens, it is our duty to ensure inflation returns to the 2% target.”

The market responded quickly to this hawkish turn: traders increased bets on rate hikes, fully pricing in two 25 basis point hikes this year, with a high probability of a third hike.

The committee removed the phrase “the benchmark rate may be further lowered” from the February statement.

One of the most “dovish” members of the Bank of England, Swati Dhingra, also said that if energy supply shocks persist, rate hikes might be necessary, highlighting the severity of the challenge. Several members noted that if not for the outbreak of war and the already weak domestic growth, they might have supported rate cuts.

Callem Pickering, Chief Global Strategist at Peel Hunt, said, “If the war drags on, posing a more persistent upside risk to inflation, the Bank of England is very likely to raise rates next.”

However, after Governor Bailey warned against overinterpreting the rate hike outlook, traders slightly reduced their bets. Currently, the market expects about 60 basis points of tightening this year, down from 78 basis points previously.

The UK’s reliance on imported energy makes it more vulnerable to disruptions in Persian Gulf supplies. European natural gas futures surged 35%, more than doubling pre-war levels; Brent crude oil briefly hit $119 per barrel, approaching the high since 2022.

Sima Shaah, Chief Global Strategist at Principal Asset Management, said, “The Monetary Policy Committee has been forced to shift quickly. Even the most dovish members support ‘holding steady,’ which itself indicates significant inflationary pressure.”

After the European Central Bank (ECB) maintained interest rates as expected, German government bonds remained under pressure. Markets are betting that the ECB will raise rates by about 70 basis points this year.

The Federal Reserve also kept rates unchanged on Wednesday, with Chair Jerome Powell stating that future rate cuts will depend on inflation trends. The swap market has largely priced out expectations of a rate cut in the US this year.

As the Middle East conflict persists and oil prices rise again, bond traders have erased bets of US rate cuts this year and have even begun hedging against possible rate hikes in the coming months.

Tom di Galoma, Managing Director at Mischler Financial Group, said, “All of this is driven by the Fed’s rate decision. The market is now beginning to expect a 50 basis point hike in 2026. The European bond market is falling freely, which is also pushing up US Treasury yields.”

He pointed out that the current market liquidity is characterized by “lack of buying, mainly selling,” with sentiment dominated by expectations of prolonged conflict. “The mainstream view now is that the Iran war could last months rather than weeks.”

(Edited by: Wen Jing)

Keywords: Gold Silver