Central Banks’ reaction to the Middle East conflict
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Article Type
Market Updates
Topic
Opinion
Published
March 24, 2026
Read time
4 mins
Authors
Irina Kurochkina, CFA
Luca Ferramosca, CFA
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Last week was extraordinary not only because of the continued volatility driven by the Middle East conflict, but also due to the unusual concentration of major central banks’ policy meetings. Investors were eagerly watching for any clues about changes to the interest rate outlook and drawing comparisons with the inflation spike in 2022.

 

Energy shock resulting from the war in the Middle East continues to pose a significant risk to the inflation outlook and is adding uncertainty to the future path of interest rates. Most central bankers last week were quick to incorporate higher oil and gas prices into their revised inflation expectations, which resulted in a more hawkish tone across the board. Bond prices came under pressure, with global Treasury yields surging to 3.46% after having touched 3.06% at the end of February 2026. At the same time, only the Reserve Bank of Australia actually delivered a hike, its second consecutive increase, reflecting persistent inflation and a strong GDP outlook rather than a direct reaction to recent geopolitical events.

 

In the US, markets are now reluctant to price in rate cuts for 2026, with investors focusing on inflation overshooting the Fed’s target. In the Eurozone and Canada, where recent inflation prints have hovered close to central bank targets and GDP outlooks remain modest, expectations have shifted from cuts toward potential hikes. However, this remains volatile and less directionally clear given the expected growth drag. The most significant interest‑rate repricing occurred in the UK, where investors had previously anticipated rate cuts from the Bank of England earlier this year. This reversed sharply toward hikes, with 2‑year gilt yields rising an eye‑watering 30 basis points on the day of the central bank meeting. In countries such as Sweden and Switzerland, the change in expectations was more muted given softer inflation dynamics, though yields still moved higher in line with global price action. In Japan, where incremental rate hikes were already expected, the repricing of the policy outlook was less pronounced, although Asian markets have been hit hard by the energy shock and inflation expectations have moved higher.

 

Below is an overview of markets that saw central bank (CB) action last week, along with key macro metrics and market implied expectations:

 

Country

CB decision

Policy rate

Dec26 implied policy rate

Inflation YoY

5y Expected Inflation

GDP YoY

10y govt bond yield

Australia

hike 25bps

4.10

4.86

3.8

2.58

2.6

5.02

Canada

hold

2.25

2.95

1.8

2.20

1.0

3.56

Eurozone

hold

2.00

2.58

1.9

2.73

1.2

3.04

Japan

hold

0.75

1.19

1.5

2.47

3.4

2.27

Sweden

hold

1.75

2.25*

0.5

0.91

2.1

2.93

Switzerland

hold

0.00

0.35

0.1

2.00**

0.7

0.40

United Kingdom

hold

3.75

4.35

3.0

3.71

1.0

4.99

United States

hold

3.5-3.75

3.65

2.4

2.61

2.0

4.38

Data source: Aegon AM, Bloomberg. Numbers in percentage. Data as of 23 March 2026 market close. 5y expected inflation refers to 5y breakeven market rate. Yield for Eurozone is for German government bond. * August 2026 policy rate pricing. **  Swiss National Bank inflation goal.

 

The comparison with the 2022 inflation spike is understandable, however, several important differences make the 2026 energy shock distinct:

 

  • Inflation was already elevated prior to the 2022 energy price increase, driven by supply bottlenecks and robust demand.
  • GDP was running above trend in many countries, supported by extensive COVID‑era government measures and “revenge spending” by consumers.
  • Labour markets were extremely tight across major economies, giving employees strong wage‑negotiation power at the time.
  • Monetary policy was still loose, with policy rates at low levels and some central banks continuing quantitative easing through balance‑sheet reinvestments.

 

Today, we are in a very different environment across all of these dimensions. As a result, the reaction function of central banks is unlikely to be the same, even though current communication remains rather hawkish. The negative impact on GDP from the energy shock may become visible more quickly this time, reducing the need for monetary policy to move into deeply restrictive territory. However, market sentiment and extreme volatility are likely to dominate price action in the short term, widening the range of possible scenarios. For now, we expect investors to focus on risk management and to remain selective in their fixed‑income allocations, while looking for opportunities to step back in as soon as the initial inflation concerns begin to subside.

Disclosure

Authors

Irina Kurochkina, CFA
Portfolio Manager
Irina Kurochkina, CFA, is a portfolio manager in the fixed income, LDI and investment solutions team with a focus on sovereigns.
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Luca Ferramosca
Portfolio Manager
Luca Ferramosca, CFA, is a portfolio manager with a focus on sovereigns. Prior to his current role, he worked as an institutional sales analyst at Aegon AM. 
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