The ongoing conflict in the Middle East has led to a significant spike in energy prices which, in turn, is reshaping market expectations regarding monetary policy in Europe. Investors are increasingly betting that the European Central Bank (ECB) and the Bank of England may need to raise interest rates again, as concerns over a new wave of inflation have emerged. The new dynamics in energy costs are pushing central bankers to reconsider their previously established policies.

According to interest rate derivatives, markets now anticipate about a 70% probability of the ECB implementing two rate hikes of 25 basis points each within 2026, with the first hike projected to occur by July. Furthermore, the money markets are exhibiting a nearly 50% probability of the Bank of England raising rates before the year's end, a stark reversal from earlier expectations that had favored rate cuts.

This shift is largely attributed to the recent energy shock, with oil prices soaring above $100 per barrel. As energy prices increase, the impact on inflation becomes more pronounced, prompting central banks to adapt their strategies accordingly. This scenario underlines the critical interrelationship between geopolitical events, energy markets, and central bank policy decisions, ultimately influencing economic stability across Europe and beyond.