Don't Let Oil Prices Scare You! JPMorgan Goes Against the Grain: Global Central Bank Rate Hike Expectations "Unreasonable"

As eight G10 central banks prepare to announce their interest rate decisions this week, the global financial markets are undoubtedly experiencing a “Super Central Bank Week.” This comes amid rising tensions in the Middle East, which have triggered a surge in oil prices, leading market traders to reprice expectations for central bank monetary policy actions—clearly leaning hawkish…

However, JPMorgan’s equity strategy team believes that “such expectations may not be reasonable” in their latest research report.

JPMorgan notes that over the past two weeks, yields on 10-year U.S. and German government bonds have surged significantly, with 2-year yields in both countries rising by 35 and 40 basis points respectively. The bank’s rate strategy team points out that the unwinding of popular positions has further amplified this trend, especially in European markets.

Following the escalation of Middle East conflicts, market expectations for the European Central Bank’s policy rate in December 2026 have increased by over 55 basis points. Meanwhile, traders have sharply lowered expectations for Fed rate cuts, with the total reduction since the beginning of the month reaching 40 basis points.

However, Mislav Matejka and the JPMorgan team believe that regardless of how geopolitical developments unfold, such bond market movements may be unsustainable.

JPMorgan emphasizes that if the conflict persists alongside high energy prices, it will suppress economic growth, potentially forcing central banks to ignore rising inflation. If the conflict ultimately triggers a recession, the likelihood of rate hikes becomes minimal; conversely, if tensions ease, short-term inflation spikes are unlikely to justify rate increases.

JPMorgan economists forecast that if the conflict eases but risk premiums remain elevated, the strong economic growth outlook for this year will not be materially affected. However, by 2026, global CPI inflation is expected to rise by about 0.5 percentage points from its already high current level.

Nevertheless, JPMorgan’s team believes this scenario does not justify the current market pricing of rate hikes in Europe, as the European economy is more sensitive to energy price shocks. The bank’s European economics team still expects the European Central Bank to keep rates unchanged in 2026 and 2027.

JPMorgan notes that the key difference between the current situation and 2022 is that the inflation increase in 2022 was driven by the lingering effects of the COVID-19 pandemic shock, and the current surge in natural gas prices critical to Europe remains well below the levels seen after the destruction of Russian-European pipeline infrastructure in 2022.

The bank expects, “We should soon see the return of long-term trading.”

(Source: Caixin)