Global interest rate markets have undergone a rapid "hawkish repricing" over the past two weeks, driven by escalating Middle East tensions and rising oil prices. However, the latest strategy reports from JPMorgan, UBS, and Goldman Sachs converge on a common conclusion: the market has priced in the linear logic that "higher oil prices equal central bank rate hikes" too aggressively, while underestimating the growth costs of the oil shock.
The scale of this repricing is already quantifiable: expectations for the European Central Bank’s 2026 policy rate have risen by more than 55 basis points, federal funds futures have trimmed roughly 40 basis points of rate cut expectations this month, and two-year yields in the U.S. and Europe have each climbed by about 35 to 40 basis points. Bets in Asian markets are even more extreme—current rate curves are pricing in four rate hikes each over the next two years in South Korea and India.
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 noted in a March 16 report that oil supply disruptions have recently pushed oil futures prices about 50% above central bank assumptions.
The core counterargument shared by the three institutions is that this oil shock is essentially a "supply-side growth tax," not a broad-based inflation spiral like in 2022. JPMorgan strategist Mislav Matejka stated clearly, "Oil price spikes driven by geopolitical escalation are clearly negative for growth and unlikely to push central banks back onto a liquidity-tightening path." UBS Asia strategist Rohit Arora similarly pointed out that the actual threshold for rate hikes is far higher than what the market is currently pricing, with central banks now favoring a policy mix of "stabilizing exchange rates, ensuring liquidity, and fiscal support," rather than directly adjusting policy rates.
**Two-Week Repricing Approaches Historical Extremes**
After quantifying the impact using its principal component factor, Goldman Sachs found that the decline in monetary policy factors over the past two weeks ranks as the third-largest since 2000.
The reaction in rate markets has been concentrated at the front end. Pricing for "higher front-end rates over the next 12 months" in most G10 economies has reached the highest level since 2023, with particularly pronounced selling in sterling front-end rates. The U.S. dollar is the only exception—its front-end curve still prices in rate cuts over the next 12 months, diverging significantly from other markets.
Asian markets have also reacted sharply. According to UBS, near-term oil futures are already about 50% higher than the assumptions used in many Asian central banks’ inflation forecasts. Their estimates show that a 10% rise in oil prices lifts average CPI in emerging Asia by about 25 basis points; if oil averages around $85 per barrel for the year, overall CPI in emerging Asia could be about 60 basis points higher than central bank projections—which would directly reshape inflation forecast paths.
However, Goldman Sachs noted that although short-term rates have risen due to hawkish expectations, its rates team has actually lowered its forecasts for 10-year yields in the U.S. and Germany, citing growing downside risks to growth that will limit long-end yield increases. "Downside growth risks would cap the upside for U.S. and European 10-year yields," wrote Goldman Sachs portfolio strategist Andrea Ferrario in a recent weekly report.
**"Growth Tax" Logic: Oil Shock May Not Drive Rate Hikes**
Strategies from all three institutions repeatedly emphasize the fundamental differences from 2022, which forms the core basis for their current assessment.
The 2022 inflation spiral resulted from multiple overlapping factors: besides rising energy prices, there were post-pandemic demand rebounds and persistent supply chain distortions. Matejka noted that before the current conflict, inflation expectations, wage growth, and services inflation were already on a downward trend—and these are the most critical drivers of an inflation spiral. Starting from this point, a short-term spike in oil prices is more likely to be "looked through" by central banks and not trigger a systemic rate hike response.
The reverse logic also holds: if the oil shock ultimately pushes the economy toward recession, central banks are even less likely to raise rates; if geopolitical tensions ease, inflation pressures could also fade. In both scenarios, the aggressive rate hike path currently priced in would be unlikely to materialize.
JPMorgan economists also provided specific thresholds: oil would need to stay at $125 per barrel or higher for the shock to approach past major episodes; to match the scale seen at the start of the Russia-Ukraine conflict, oil might need to approach $150 and remain there for several months. Under a relatively mild scenario where tensions ease but risk premiums remain elevated, global CPI inflation in 2026 could rise by about 0.5 percentage points from already elevated levels—even then, they do not believe this would lead to the kind of rate hike path currently expected in European markets, because regional growth is more sensitive to such shocks.
**Asian Divergence: Philippines, South Korea, Indonesia Face Highest Inflation Pressure, But Hike Thresholds Remain High**
Even though overall rate hike pricing appears aggressive, vulnerability varies significantly across economies.
UBS scenario analysis, based on oil averaging $85 per barrel, suggests the Philippines’ 2026 CPI could rise from the central bank’s projected 3.6% to about 4.3%, deviating from the 3.0% target by about 1.6 percentage points; South Korea’s could increase from 2.2% to about 2.8%, deviating from the 2.0% target by about 1.0 percentage point; Indonesia’s could go from 2.5% to about 3.1%, deviating by about 0.8 percentage points. In contrast, Malaysia’s deviation is only about 0.2 percentage points, Singapore’s is nearly zero, India’s remains slightly below its 5.0% target, and Thailand’s inflation stays below target even with higher oil prices.
However, UBS emphasized that "inflation overshooting" does not automatically mean "central bank rate hikes." Additional conditions would need to be met: oil prices remaining above $80 per barrel in the second half of the year, mild growth spillover effects, and clearer signs of secondary inflation risks. Their historical sensitivity estimates show that oil in the $80–90 per barrel range could reduce emerging Asia’s GDP by about 60 basis points, or lower growth by about 1 percentage point below trend—with higher growth exposure in the Philippines and Thailand, and relatively lower exposure in Malaysia.
Additionally, UBS noted that current real policy rates in Asia are about 225 basis points higher than in 2022, further raising the bar for initiating rate hikes.
**Central Banks’ Actual Choices: FX Intervention and Fiscal Support First**
There is a clear gap between the actual recent moves by major central banks and the aggressive pricing in rate markets.
According to UBS, recent policy responses have focused on smoothing exchange rates, maintaining liquidity stability, and targeted fiscal support, rather than directly tightening monetary policy. India has been smoothing its currency while conducting open market bond purchases and FX swaps; parliament has approved about $24 billion in additional net expenditure for the new fiscal year. Indonesia’s central bank prioritizes rupiah stability, intervening in both spot and NDF markets. South Korea has introduced about 20 trillion won in supplementary budgets and fuel price caps, while the central bank announced roughly 3 trillion won in government bond purchases to stabilize markets.
UBS categorized potential policy paths into three groups: the Monetary Authority of Singapore may act first due to growth factors, with a higher likelihood of a steeper policy slope adjustment (0.5% per annum) by mid-April; South Korea, Malaysia, and the Philippines could see calibrated rate hikes in the second half if oil prices remain high, but this is "not the base case"; economies like India, Thailand, and Indonesia, which are in rate-cutting or easing mode, are more likely to pause easing rather than turn to hikes.
Goldman Sachs economists expect most major central banks (Fed, ECB, BoE, BoJ, SNB, Riksbank, BoC) to hold rates steady this week, with the Reserve Bank of Australia being the only one expected to hike. This pattern of "many meetings but little action" contrasts sharply with the aggressive pricing in rate markets.
**Positioning Unwound, Emotional "Surrender" Raises Risk of Whipsaw**
The mismatch between sentiment and positioning is another operational risk highlighted repeatedly by the three institutions.
JPMorgan observed that market narrative has quickly shifted from "buy the dip" early in the conflict to "betting on a prolonged standoff, new oil highs, and a repeat of 2022." However, technical indicators and positioning data do not support the idea that a "full unwind" has occurred—RSI in major markets remains above 30, and positioning changes reflect reduced risk exposure rather than a broad shift to net short. This kind of emotional "surrender," in the view of Matejka’s team, actually raises the cost of continuing to chase downside moves.
Goldman Sachs also pointed out that, compared with 2022, the market’s repricing of growth risks is clearly insufficient: credit excess returns, cyclical versus defensive stock performance, and U.S. equity pricing of recession have not reached levels suggesting serious trouble. The decline in U.S. and German 10-year government bonds has also been more restrained.
This structure also undermines the effectiveness of equity-bond hedging. Goldman calculations show that the S&P 500’s beta to U.S. 10-year real rates and breakeven inflation has turned significantly negative. This means rate volatility no longer naturally benefits defensive allocations, increasing the importance of active hedging tools.
JPMorgan’s assessment is that if a true "reckoning" occurs, it may be concentrated in a two- to three-day selling window, possibly coinciding with oil prices surging toward $120–130 per barrel—but after that, a counter-trend "re-risk" rally could potentially extend further.
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