Investors are betting that central bankers could be forced to raise interest rates in response to the Iran war, as an energy price shock triggers a dramatic reassessment of previous expectations for further cuts.
The European Central Bank is now expected to lift its key rate once or twice this year as soaring oil and gas prices reignite inflationary pressures, according to levels implied by swaps contracts. A rate increase from the Bank of England is also viewed as a possibility by the end of the year, a sharp turnaround from the rate cuts priced in before the conflict broke out.
Investors have also started dialling back expectations for further US Federal Reserve rate reductions, with just one or two quarter-point cuts priced into futures markets, down from two or three before the conflict began.