Finance
Traders Stick With Hawkish Rate Bets on Big Day for European Central Banks
Published by Global Banking & Finance Review®
Posted on March 19, 2026
3 min readLast updated: March 19, 2026
Quick Summary
Investors remain firmly hawkish ahead of ECB and BoE decisions on March 19, as surging energy prices—fuelled by the Iran conflict—dash hopes for rate cuts and push money markets to price in substantial rate hikes, while bond yields climb sharply across Europe.
Traders add to hawkish rate bets on big day for European central banks
Central Bank Decisions and Market Reactions
By Samuel Indyk and Yoruk Bahceli
LONDON, March 19 (Reuters) - Investors ramped up bets for interest rate hikes in Europe on Thursday before European Central Bank and Bank of England policy decisions, as the escalating U.S.-Israeli war with Iran pushed up energy prices and stoked inflation fears.
Federal Reserve Holds Steady Amid Inflation Concerns
The Federal Reserve on Wednesday held rates steady, but forecast higher inflation this year than it had previously due to surging energy prices, clouding the rate outlook.
European Central Banks Respond to Global Tensions
The Swiss and Swedish central banks both kept rates on hold on Thursday, but flagged inflation and growth risks from the war, amid a pivotal week of global central bank meetings.
Impact of Rising Oil Prices
Oil prices, trading at $115 a barrel, have jumped almost 55% this year and investors expect major central banks to be more responsive to higher energy prices than they have in the past, especially with the early 2020s inflationary shock fresh in the memory.
Expert Commentary
"Overall, I expect (central banks) to be more hawkish just because they have an inflation shock that's working its way through the system," said Franklin Templeton's head of European fixed income David Zahn.
"Our overall view is that this is definitely inflationary and this means the ECB will be hiking, probably this summer."
Market Pricing for ECB and BoE
A renewed surge in energy prices overnight has pushed money market traders to price in over 55 basis points (bps) of ECB tightening by year-end, implying at least two quarter-point rate hikes.
The first rate hike is fully priced in by June. Prior to the conflict, investors had been pricing a small chance of a rate cut this year.
Markets had expected the BoE to lower rates this week as the labour market showed signs of weakening, before the war upended those bets. Markets now bet that the BoE will hike rates at least once in 2026.
For the Fed, investors now see just a 40% chance of a single rate cut this year. Before the conflict, markets had expected at least two quarter-point rate cuts.
Bond Markets on Edge
The hawkish global repricing has pushed up bond yields sharply, with the German and Italian economies particularly sensitive to rising energy costs.
Germany's two-year government bond yield, sensitive to changes in rate expectations, has jumped almost 50 basis points this month to its highest level since August 2024.
Britain's two-year yield touched its highest level in almost a year on Thursday at 4.282%. It's up over 70 bps since the start of the war.
Global Central Bank Responses
The Reserve Bank of Australia raised its rate on Tuesday, warning of a "material" risk to inflation. It was the first major central bank to announce policy since the start of the Middle East conflict.
The Bank of Japan held rates steady on Thursday but warned of the impact rising oil could have on prices.
(Reporting by Samuel Indyk and Yoruk Bahceli; editing by Dhara Ranasinghe, Alexandra Hudson)
Key Takeaways
- •Oil and gas prices have surged—Brent crude is up ~50% since the start of 2026, and European gas nearly doubled—intensifying inflation concerns and dampening rate cut bets. (finance-commerce.com)
- •Money markets now price in over 55 basis points of ECB tightening by the end of 2026, including a fully priced-in quarter-point hike by June; BoE hikes now expected at least once in 2026. (investing.com)
- •Bond yields have surged: Germany’s 2-year yield is up ~50 bps this month, though exact recent figures aren’t available; UK’s 2-year yield rose to 4.282%, its highest in nearly a year. (investing.com)
References
Frequently Asked Questions about Traders stick with hawkish rate bets on big day for European central banks
1Why are investors expecting European central banks to hike rates?
Rising energy prices and increased inflation fears have led investors to expect rate hikes from European central banks to tackle inflation.
2How has the US-Israeli conflict with Iran affected interest rate expectations?
The conflict has increased oil prices and driven inflation fears, making rate cuts less likely and shifting expectations towards rate hikes.
3What is the bond market's reaction to anticipated rate hikes?
Bond yields in Europe, especially in Germany and Britain, have risen significantly as traders price in higher rates.
4Are any other major central banks mentioned in the article?
Yes, the article discusses decisions by the Federal Reserve, Swiss National Bank, Swedish Riksbank, Reserve Bank of Australia, and Bank of Japan.
5When do traders expect the first ECB rate hike?
Traders have fully priced in the first ECB rate hike by June.
