Oil Prices Surge, Will Central Banks Raise Rates? Market Pricing Might Be Overblown

From the escalation of Middle East tensions to soaring oil prices, the global interest rate markets have experienced a rapid “hawkish repricing” over the past two weeks.

However, according to Wind Trading Desk, the latest strategy reports from JPMorgan, UBS, and Goldman Sachs all point to the same conclusion: the market’s linear pricing of “oil prices rising equals central bank rate hikes” is overly aggressive, and the growth costs of oil shocks are actually underestimated.

The scale of repricing has specific benchmarks: the European Central Bank’s 2026 policy rate expectations have been raised by over 55 basis points; Fed funds futures have cut about 40 basis points of rate cut expectations this month; US and European two-year yields have each risen about 35 to 40 basis points. Asian markets’ bets are even more extreme—the current yield curve has already priced in four rate hikes for Korea and India over the next two years.

Goldman Sachs characterized the volatility in monetary policy factors over the past two weeks as the third-largest two-week decline since 2000. UBS FX strategist Rohit Arora, in a March 16 report, directly pointed out that recent oil futures prices are about 50% higher than central banks’ expectations due to supply disruptions.

The core rebuttal from all three institutions is similar: this round of oil price shocks is essentially a “supply-side growth tax,” not a broad-based inflation spiral like in 2022. JPM strategist Mislav Matejka bluntly stated, “The surge in oil prices driven by geopolitical escalation is clearly detrimental to growth and makes it difficult for central banks to return to tightening monetary policy.” UBS Asia strategist Rohit Arora also noted that the real rate hike thresholds are much higher than current market pricing, as central banks are currently more inclined toward “stabilizing exchange rates, maintaining liquidity, and fiscal support” rather than directly using policy rates.

Repricing nearly at historical extremes in two weeks

Goldman Sachs quantified this impact using its principal component factors: the decline in monetary policy factors over the past two weeks ranks as the third-largest since 2000.

The market’s reaction is concentrated at the front end. Most G10 economies are pricing in the highest front-end rate increases since 2023, with the most pronounced sell-off in the pound front end. The US dollar is the only exception—its front curve still prices in rate cuts over the next 12 months, diverging sharply from other markets.

Asian markets also reacted strongly. According to UBS, near-term oil futures are about 50% higher than the assumptions used in many Asian central banks’ inflation forecasts. Their estimates show that a $10 increase in oil prices raises emerging Asian CPI by about 25 basis points on average; if oil prices stay around $85 per barrel throughout the year, the overall CPI in emerging Asia could be about 60 basis points higher than central bank forecasts—directly rewriting their inflation paths.

However, Goldman Sachs pointed out that although short-term rates have risen due to hawkish expectations, their interest rate team has actually lowered their forecasts for 10-year US and German yields, citing downside growth risks that will suppress long-term yields. “Downside growth risks will limit the upside potential of 10-year yields in the US and Europe,” said Andrea Ferrario, Goldman Sachs’ macro strategist, in the latest weekly report.

“Growth tax” logic: oil shocks may not necessarily push central banks to hike

All three institutions repeatedly emphasize a key difference from 2022, which is central to their current judgment.

The inflation spiral in 2022 was the result of multiple factors: rising energy prices, post-pandemic demand rebound, and ongoing supply chain distortions. Matejka pointed out that before this conflict, inflation expectations, wage growth, and service inflation were already on a downward trajectory—and these are the key fuels of inflation spirals. At this starting point, short-term oil price jumps are more likely to be “seen through” by central banks rather than triggering systemic rate hikes.

The logic also works in reverse: if oil shocks ultimately drag the economy into recession, central banks are even less likely to hike rates; if geopolitical tensions ease, inflation pressures may also dissipate. In both scenarios, the aggressive rate hike paths currently priced in are unlikely to materialize.

JPM economists have also set a clear threshold: crude oil prices need to stay at $125 per barrel or above for the impact to approach the scale of recent major shocks; to reach the scale of early Russia-Ukraine conflict, oil would need to approach $150 and remain elevated for months. In a more moderate scenario, even if tensions ease but risk premiums remain high, global CPI inflation could rise by about 0.5 percentage points from already elevated levels—yet they do not believe this would lead to the rate hike paths currently expected in Europe, as regional growth is more sensitive to such shocks.

Asia Divergence: Philippines, Korea, Indonesia face the greatest inflation pressures, but rate hike thresholds remain high

Even though overall rate hike expectations are aggressive, the vulnerability levels of different economies vary significantly.

UBS’s scenario analysis, based on an average oil price of $85 per barrel, suggests: Philippines’ 2026 CPI could rise from the central bank’s 3.6% forecast to about 4.3%, deviating about 1.6 percentage points from the 3.0% target; Korea from 2.2% to about 2.8%, deviating about 1.0 point from the 2.0% target; Indonesia from 2.5% to about 3.1%, deviating about 0.8 points. In contrast, Malaysia’s deviation is only about 0.2 points, Singapore is nearly on target, India is slightly below its 5.0% target, and even with oil prices rising, Thailand’s inflation remains below target.

However, UBS emphasizes that “inflation exceeding targets” does not automatically mean “central bank hikes.” Conditions include: oil prices remaining above $80 per barrel in the second half, moderate spillover effects from growth, and the emergence of clearer second-round inflation risks. Historical sensitivity estimates show that if oil stays between $80 and $90, emerging Asian GDP could decline by about 60 basis points, or growth could be about 1 percentage point below trend—Philippines and Thailand are more exposed, Malaysia less so.

Additionally, UBS notes that the current real interest rate levels in Asia are about 225 basis points higher than in 2022, further raising the threshold for initiating rate hikes.

Central banks’ actual choices: exchange rate interventions and fiscal priorities

Major central banks’ recent actions differ markedly from the aggressive market pricing.

According to UBS, recent policy responses mainly focus on smoothing exchange rates, maintaining liquidity, and targeted fiscal support, rather than tightening monetary policy directly. India, for example, is stabilizing the exchange rate while conducting open market purchases and foreign exchange swaps; the government has approved about $24 billion in net additional spending for the new fiscal year; Indonesia prioritizes currency stability through interventions in spot and NDF markets; Korea has introduced a supplementary budget of about 20 trillion won and capped fuel prices, with the central bank also announcing about 3 trillion won in government bond purchases to stabilize markets.

UBS categorizes potential policy paths into three: Singapore’s MAS might act first due to growth concerns, with a higher probability of a mid-April policy tilt adjustment (0.5% p.a.); Korea, Malaysia, and the Philippines could consider calibrated rate hikes in the second half if oil prices stay high, but “this is not the baseline”; economies like India, Thailand, and Indonesia, currently in easing or accommodative modes, are more likely to pause rate cuts rather than switch to hikes.

Goldman Sachs economists expect that this week, major central banks (Fed, ECB, BoE, BoJ, SNB, Riksbank, BoC) are likely to keep rates unchanged, with the only expected hike from the Reserve Bank of Australia. The pattern of “many meetings but little action” contrasts sharply with the market’s aggressive rate pricing.

Positions not yet cleared, and sentiment of “giving up” more vulnerable to volatile reversals

The disconnect between sentiment and positioning is another operational risk highlighted repeatedly by the three institutions.

JPM observes that market narratives have shifted from early “buy on dips” during the conflict to “betting on a prolonged war, new highs in oil prices, and a repeat of 2022.” However, technical indicators and positioning data do not support a “complete deleveraging”—most market RSIs remain above 30, and changes in holdings mainly reflect risk reduction rather than widespread net shorting. This “surrender” in sentiment, in Matejka’s view, actually raises the cost of further shorting.

Goldman Sachs also notes that compared to 2022, the market’s repricing of growth risks is significantly insufficient: excess returns from credit, relative performance of cyclical versus defensive stocks, and the pricing of recession in US equities have not reached levels indicating “big trouble”; the declines in US and German 10-year yields are also more restrained.

This structure also undermines the effectiveness of equity-bond hedges. Goldman Sachs estimates that the beta of the S&P 500 to US 10-year real yields and breakeven inflation has turned significantly negative. This means rate fluctuations are no longer inherently favorable to defensive allocations, increasing the importance of active hedging tools.

JPM’s view is that if a true “liquidation moment” occurs, it may be concentrated in a 2-3 day sell-off window, possibly coinciding with oil prices surging toward $120–130, but afterward, the reverse “re-risking” rally could go even further.