Financial markets pushed up the probability of interest-rate increases across several major central banks on Monday as the conflict in Iran drove energy costs higher and revived concerns about a renewed inflationary episode. Market pricing showed stronger chances of rate hikes by the European Central Bank (ECB), the Swiss National Bank (SNB) and Sweden's Riksbank before the end of the year, and signalled that the Bank of England (BoE) could follow suit in 2027. Asian central banks, meanwhile, appeared to be shelving plans for rate cuts and in some cases weighing the possibility of hikes.
The dramatic shift in expectations coincided with production cuts by major oil producers and mounting anxiety over prolonged shipping disruptions. Benchmark crude rose above $119 a barrel, reaching its highest level since mid-2022, reflecting those supply concerns.
For many policymakers the recent price moves reopened painful memories from 2022. Back then, Russia's invasion of Ukraine sparked an energy shock that quickly transmitted into broader consumer-price increases, and several central banks were criticised for responding too late. Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, captured that unease: "That’s a trauma that is very much alive among some central bankers, so we cannot ignore that," he said. "They will be worried about another supply shock with the potential ... to have spillovers to the rest of the supply chain."
Money-market-implied paths showed the ECB most likely to raise rates once by June or July and then again by December. The Riksbank's forward curve pointed to one or two hikes in the autumn. Markets placed a potential SNB move in October and priced a further tightening step for 2027, with the Bank of England also more likely to re-enter a tightening cycle in that later period. All four central banks are due to meet on March 18 and 19, and no immediate changes were expected at those meetings.
Officials, particularly at the ECB, have emphasised that a temporary spike in oil driven by the Iran conflict should not necessarily alter the medium-term inflation profile or trigger a policy reaction. But they warn that a persistent rise in energy prices would have tangible effects. Analysis from TS Lombard cited in market commentary indicated that if oil and gas prices remained at current levels, euro zone inflation could be pushed up by roughly one percentage point, with the United Kingdom only slightly behind. Higher fuel costs would also reverberate through transport and manufacturing, much as occurred in 2022.
Market strategists said the experience of 2022 was likely to make policymakers less patient this time. "In 2022, the ECB waited too long, because it was coming off a decade of deflation," said Marco Brancolini, head of euro rates strategy at Nomura. "Now the (ECB’s) Governing Council will be much less patient as it will want to avoid a repeat of 2022."
The central question facing policymakers is whether to adhere to traditional textbook guidance - which suggests looking through temporary supply shocks - or to act on the basis of recent, costly experience. Reinhard Cluse, an economist at UBS, framed the dilemma: "The ECB’s long-standing principle has been to 'look through' external energy supply shocks, because the initial price shock is inevitable and possibly transitory and monetary policy tightening would only make the resulting output loss worse," he said. "However, with the latest energy price moves and the risk of second-round effects, we acknowledge the risk that the ECB might have to bring the first hike forward."
Despite the substantial repricing, several economists cautioned that markets might be moving ahead of policymakers. Pictet's Ducrozet suggested the SNB was among the least likely central banks to raise rates in the short term, given a strengthening Swiss franc that often acts as a safe-haven currency.
Other market participants described the adjustment in rate expectations as driven in part by technical repositioning. Alberto Gallo, chief investment officer at Andromeda Capital Management, said the shift reflected a rapid unwinding of earlier bets on rate cuts - a view that was echoed by Nomura's Brancolini. "Market pricing is driven by the capitulation of crowded positions on the curve as well as risk-off hedges," Brancolini said. That forced recalibration has coincided with a more defensive stance among investors as geopolitical risk spiked and commodity markets tightened.
With energy prices elevated and the possibility of shipping disruptions still unresolved, central banks face competing incentives: to avoid overreacting to a transient shock that might fade, and to guard against the broader inflationary spillovers that could force them into more rapid tightening. How policymakers balance those risks in the coming weeks and months will shape policy expectations and market pricing across Europe and beyond.
Summary: The Iran conflict has driven oil above $119 a barrel and increased market odds of rate hikes by the ECB, SNB and Riksbank this year, while pushing the BoE back into the tightening debate for 2027. Officials warn a temporary spike need not change medium-term inflation projections, but a sustained energy-price increase could prompt policy action.