MW How America's war is turning into a European market nightmare
By Steve Goldstein
Bank of England and European Central Bank rate-hike expectations soar
Rate-hike expectations are soaring for the European Central Bank and the Bank of England.
The U.S.-Israeli attacks on Iran are hurting European markets most of all, with interest-rate expectations surging for both the Bank of England and European Central Bank on Thursday.
Expectations priced in three rate hikes at both institutions on a day each central bank held interest rates steady. According to LSEG, expectations are that the Bank of England will hike rates at its next meeting, in April. Traders are giving a hike in April by the ECB a 47% probability.
In the U.S., expectations are that there will be no interest-rate hikes this year, reflecting not just that the U.S. is a net producer of oil but also that it's less sensitive to the disruptions coming from the Strait of Hormuz being effectively shut down.
The Bank of England said in its statement on Thursday that it was alert to the "increased risk of domestic inflationary pressures through second-round effects in wage and price-setting, the risk of which would be greater the longer higher energy prices persisted." Analysts were surprised at the unanimous decision of the usually fractured Monetary Policy Committee, and by the statement using the past tense to refer to "disinflation."
European countries use the Brent grade of crude oil that's seen bigger price gains than the West Texas intermediate crude that American refineries use, as European natural-gas prices have surged more than the equivalent U.S. product.
The difference can be clearly seen in the bond market. The 2-year U.S. Treasury yield BX:TMUBMUSD02Y rose 7 basis points on Wednesday after the Federal Open Market Committee meeting. The equivalent maturity for the U.K. BX:TMBMKGB-02Y jumped 21 basis points and for Germany BX:TMBMKDE-02Y by 12 basis points.
Investor interest in rotating into European equities has all but evaporated after a strong start to the year. The Vanguard FTSE Europe exchange-traded fund VGK, one of the most popular vehicles used by U.S. investors to invest in Europe, is now down 2% on the year, having been up as much as 8% ahead of the conflict in Iran.
Thursday's move also coincided with a surge in Brent oil futures after a round of attacks on key Middle Eastern energy facilities.
The staff at the European Central Bank hiked their inflation forecast to 2.6% for all of 2026, from 1.9% previously, and said inflation will hit not just commodity markets but real incomes and confidence.
"The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth. It will have a material impact on near-term inflation through higher energy prices," the ECB said in a statement.
"Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy."
-Steve Goldstein
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(END) Dow Jones Newswires
March 19, 2026 09:51 ET (13:51 GMT)
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