Miao Yanliang: Will Oil Price Shocks Lead to a Central Bank Rate Hike Wave?

The situation in Iran has escalated, and the expectations for interest rate cuts by Western central banks have completely reversed to expectations of rate hikes.

Recently, the situation in Iran has further escalated, leading to another rise in oil prices and increasing concerns about stagflation in the US and European economies. Last week was a “Super Central Bank Week,” during which the Federal Reserve, the European Central Bank, and the Bank of England all issued hawkish signals, causing investors to significantly raise their expectations for monetary policy paths. The futures market’s implied timing for a Federal Reserve rate cut has been pushed back to the second half of 2027, with some expectations of rate hikes in 2026. Expectations for rate cuts by the ECB and the Bank of England have also reversed to expectations of rate hikes (Chart 1).

Chart 1: Futures market expectations for policy moves by the US and European central banks rapidly shifted from rate cuts to rate hikes in 2026.

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