Rare movement! The Bank of England and the European Central Bank decisions are coming up, and traders are still increasing bets on rate hikes.

How will AI Bailey and Lagarde balance inflation fears and economic stability?

On the eve of the latest decision announcement from the Eurozone and UK central banks, the short-term interest rate markets have experienced a sharp “hawkish repricing,” prompting questions about whether the market’s rate hike expectations are justified and how the central banks might respond.

Amid the looming energy crisis, traders are betting that the Bank of England and the European Central Bank will implement more rate hikes — just hours before their policymakers are set to release their latest decisions.

After Iran attacked the world’s largest liquefied natural gas (LNG) export facility, natural gas prices surged again, reigniting inflation fears as markets begin to price in more aggressive tightening policies from central banks.

The currency markets currently expect the European Central Bank to raise rates more than twice by 2026 (by 25 basis points each time); traders are also betting that the Bank of England will tighten by about 40 basis points before the end of the year — a significant upward revision since Wednesday. Although markets generally expect both banks to hold steady today, investors will focus on officials’ speeches to assess how Middle East conflicts might influence their policy outlooks.

This context puts Bank of England Governor Bailey and ECB President Lagarde in a dilemma. The recent surge in natural gas prices may render their recent discussions with colleagues outdated, and they are now compelled to respond: Is the market’s current rate hike expectation justified?

Andrzej Szczepaniak, senior European economist at Nomura International Plc, said, “A series of events pushed natural gas prices higher overnight. It’s very rare to see such a sharp adjustment in interest rate expectations ahead of a central bank decision, but we are in an extraordinary period.”

Less than three weeks ago, markets widely expected today’s ECB meeting to end quietly, with policymakers holding rates steady for the year; the Bank of England was also broadly expected to cut rates today due to a weakening labor market.

But the outbreak of conflict in the Middle East and disruptions to global energy and trade have completely shattered these expectations. On Thursday, Brent crude oil briefly surged past $113 per barrel, severely impacting energy-importing countries like those in Europe and the UK.

European bond markets tumbled across the board, with short-term bonds most affected due to their close ties to rate expectations. The UK 2-year government bond yield soared 15 basis points to 4.25%, the highest in nearly a year; Germany’s 2-year yield rose 8 basis points to 2.52%.

Francesco Pesole, strategist at ING Group NV, said the “hawkish repricing” in the eurozone short-term interest rate market indicates that “even subtle hints can amplify short-term rate movements,” adding that “to match current pricing, the ECB needs to provide some guidance, but we doubt they are ready to do so at this point.”