The ECB announced interest rate hikes in July and September to combat record inflation.
Daniel Roland | AFP | Getty Images
American political strategist James Carville famously said that he wanted to reincarnate the bond market because “anyone can blackmail anyone.” So when bond yields start showing signs of trouble, the entire market listens.
Escalating rhetoric over the Middle East wars has led to what Deutsche Bank calls “the most hawkish central bank pricing so far this year for both the[European Central Bank]and the Fed.”
Last week, government bonds were sold off across the board, especially in Europe. 10 year bond France hit its highest level since October 2023. 10 years OAT Yields rose to their highest levels since the 2011 European debt crisis. british gold leaf The 10-year bond yield hit its highest level in at least six months, and markets followed the same path, pricing in an 82% chance that the Bank of England would raise interest rates this year. Yes, hiking!
On the other side of the Atlantic, expectations about the Fed’s ability to cut rates have declined significantly, with just 20 basis points of rate cuts priced in by the end of the year. According to Deutsche Bank, this means that for the first time, a 2026 rate cut by the Fed is not fully priced in.
“Central banks can weather temporary energy shocks, but persistent inflation risks will slow easing,” Altaf Kassam of State Street Investment Management told CNBC, adding that an extreme shock could reintroduce a tightening bias.
Let’s start with the Fed.
President Donald Trump renewed his attack on the Federal Reserve, asking Truth Social: “Where is Federal Reserve Chairman Jerome ‘Too Late’ Powell today? He should lower interest rates immediately.”
But in recent days, traders have given up hope for Fed easing, making a rate cut this year less likely. Gregory Daco, chief economist at EY Parthenon, said in a recent note that current market conditions “increase the likelihood that Powell will continue to lead the FOMC beyond May.” The Federal Reserve begins a two-day meeting on Tuesday.
A livestream shows Federal Reserve Chairman Jerome Powell speaking after the Federal Open Market Committee (FOMC) meeting on the floor of the New York Stock Exchange (NYSE) on Wednesday, January 28, 2026 in New York, USA.
Michael Nagle | Bloomberg | Getty Images
Should we wait and see what the ECB does?
ECB President Christine Lagarde said Europe’s economy was in a better position to absorb an inflationary shock, telling France 2: “We will do everything necessary to ensure that inflation is contained.”
Analysts are less convinced, with BNP Paribas saying uncertainty over Iran will “undermine the ECB’s ‘good’ claims”. The consensus expectation is that the central bank will keep rates on hold on Thursday, but in a recent interview with Bloomberg, board member Peter Kazimir suggested policymakers may choose to raise rates sooner than expected.
Don’t bore me, BOE
The Bank of England is expected to keep interest rates unchanged at 3.75% at Thursday’s board meeting. In a recent note, Oxford Economics outlined a worst-case scenario in which oil prices rise to $140 a barrel, causing a significant rise in inflation and potentially pushing the UK economy into a mild recession.
A person takes shelter from the rain while walking near the Bank of England building on the day the Monetary Policy Committee lowered interest rates on December 18, 2025 in London, United Kingdom.
Toby Melville | Reuters
This week’s World Central Bank Meeting
Monday: Reserve Bank of Australia Day 1
Tuesday: Reserve Bank of Australia Day 2, Federal Reserve FOMC Day 1
Wednesday: Federal Reserve FOMC Day 2, Bank of Canada
Thursday: Bank of England, European Central Bank, Swiss National Bank, Swedish National Bank
