It took a while for it to really strike deep, but the seeds were already planted in the first week of the Middle East conflict. And now with Iran also trying to disrupt things on a broader scale, we are seeing inflation fears sweep across markets this week.
Higher oil prices are the main issue now and that will already start to have an impact, seeing a major shift in central bank expectations.
After having forecast both the ECB and BOE to keep interest rates unchanged throughout the year, JP Morgan is now one to see rate hikes for both as early as April next.
On the ECB, the firm expects to see two rate hikes in April and July now. However, they note that "in terms of timing, there will be an inclination to wait for new forecasts at the June meeting but a confirmation of the March baseline at the time of the April meeting should suffice to trigger a rate hike".
Despite the more hawkish shift though, JP Morgan also sees a case of the ECB reversing the tightening steps this year. They argue that once the risk of second-round effect passes, the central bank will have scope to pull back on rates again. As such, they are penciling in one rate cut for next year in 2H 2027.
As for the BOE, the firm now expects two rate hikes in April and July as well. That as inflation is likely to creep higher in the UK before only falling back next year. However, they don't see that happening until the spring of 2027. As such, the BOE will not regain much appetite for rate cuts in the meantime. JP Morgan is penciling in two rate cuts in Q2 and Q4 2027, following the two rate hikes this year.
For some context, market pricing for the ECB before the war was for zero rate changes through the year. As for the BOE, traders were pricing in ~52 bps of rate cuts this year before the US-Iran conflict began. Quite the change, huh?
