Oil prices soar, central bank raises interest rates? The market may be overreacting.

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From the escalation of the Middle East situation to soaring oil prices, the global interest rate market has experienced a rapid round of "hawkish repricing" in the past two weeks.

However, according to Chasing Wind Trading Desk, the latest strategy reports from JPMorgan, UBS, and Goldman Sachs all point to the same conclusion: the market’s linear logic of "oil price rise equals central bank rate hikes" has been priced in too aggressively, while the growth cost of the oil shock has actually been underestimated.

The magnitude of the repricing is now clear: the European Central Bank’s 2026 policy rate expectations have been raised by over 55 basis points; since this month, federal funds futures have priced out about 40 basis points of rate cuts; U.S. and European 2-year yields have both risen around 35 to 40 basis points. Asian market bets are even more extreme—the current curves have priced in four rate hikes each for South Korea and India over the next two years.

Goldman Sachs qualifies the recent volatility in monetary policy factors as the third largest two-week fall since 2000. UBS FX strategist Rohit Arora stated directly in a March 16 report that oil supply disruptions have caused recent oil futures prices to be 50% higher than central banks’ forecasts.

The three institutions share a similar core rebuttal logic: the essence of the current oil price shock is a "supply-side growth tax," not a 2022-style broad-based inflation spiral. JPMorgan strategist Mislav Matejka states bluntly, "The oil price surge driven by geopolitical escalation is clearly detrimental to growth and is unlikely to prompt central banks to resume tightening liquidity." UBS Asia strategist Rohit Arora also noted that the real threshold for rate hikes is much higher than what the market currently prices in. Central banks now prefer a policy mix of "stabilizing exchange rates, protecting liquidity, and fiscal support" rather than directly using policy rates.

Two-Week Repricing Approaches Historic Extremes

Goldman Sachs’ own principal component analysis found: the two-week drop in monetary policy factors ranks as the third largest since 2000.

The moves have been concentrated on the short-end of the rates curve. Most G10 economies saw pricing for "higher front-end rates over the next 12 months" at the largest magnitude since 2023, with front-end selling in sterling particularly prominent. The U.S. dollar is the only exception—its curve still prices in rate cuts over the next 12 months, showing clear divergence from other markets.

Asian market reactions have also been intense. According to UBS, near-term oil futures prices are about 50% higher than the assumptions used by many Asian central banks in their inflation forecasts. Their calculations show that for every 10% rise in oil prices, average CPI in emerging Asia rises about 25 basis points; if oil prices average $85/bbl for the year, CPI may overshoot central bank forecasts by about 60 basis points—directly altering the inflation path for these central banks.

However, Goldman Sachs notes that although short-end rates are rising on hawkish expectations, its rates team actually revised down U.S. and German 10-year yield forecasts, precisely because downside growth risks will cap longer-term rates. "Downside growth risks will limit the upside for 10-year yields in the U.S. and Europe," wrote Goldman cross-asset strategist Andrea Ferrario in the latest weekly report.

The "Growth Tax" Logic: Oil Shocks May Not Trigger Central Bank Rate Hikes

All three institutions’ strategies keep stressing the essential difference with 2022, which is the core of current judgment.

The inflation spiral of 2022 was a result of multiple factors: not only higher energy, but also post-pandemic demand rebound and persistent supply chain distortions. Matejka points out, before this round of conflict, inflation expectations, wage growth, and services inflation were already on a downward track—and these are the key drivers of the inflation spiral. From this starting point, a short-term oil price jump is more likely to be "looked through" by central banks rather than trigger systematic rate hikes.

The reverse is also true: if the oil shock eventually drags the economy toward recession, central banks are even less likely to hike; if the geopolitical situation eases, inflation pressures may dissipate. In both cases, the current aggressive rate hiking path priced in will be hard to materialize.

JPMorgan economists also offered precise thresholds: crude oil needs to stay at $125/bbl or above for the shock to approach previous large-scale episodes; to match the early Russia-Ukraine war scope, oil would need to reach around $150 and persist for months. In a relatively moderate scenario, even if conflict eases but risk premiums remain high, global CPI inflation in 2026 could rise about half a percentage point from already-elevated levels—even so, they do not expect this would justify the kind of rate hiking path now priced for Europe, as the region is more sensitive to growth shocks.

Asian Divergence: Philippines, South Korea, and Indonesia Face Most Pressure, But Hike Thresholds Remain High

Even with aggressive overall rate hike pricing, different economies have significant differences in vulnerability.

UBS's scenario analysis, based on $85/bbl oil: the Philippines’ 2026 CPI may rise from the central bank’s forecast of 3.6% to about 4.3%, deviating about 1.6 percentage points from the 3.0% target; Korea from 2.2% to about 2.8%, or about 1.0 percentage points above target; Indonesia from 2.5% to about 3.1%, 0.8 points above target. By contrast, Malaysia’s deviation is only about 0.2 points, Singapore’s is essentially zero, India remains just below its 5.0% target, and Thailand’s inflation stays below target even if oil rises.

However, UBS stresses that "above-target inflation" does not automatically mean "central bank rate hikes"; other conditions must also be met: oil must remain above $80/bbl in the second half, growth spillovers stay modest, and there are clearer signs of second-round inflation effects. Historical sensitivity estimates show oil at $80–90/bbl could reduce emerging Asia’s GDP by about 60bps, or about 1 percentage point below trend growth—vulnerability is higher for the Philippines and Thailand, lower for Malaysia.

Additionally, UBS points out that Asia’s current real policy rates are already about 225bps higher than in 2022, further raising the threshold for launching new hikes.

What Central Banks Are Actually Doing: FX Intervention and Fiscal Support Take Priority

Main central banks’ current actions are clearly at odds with aggressive market pricing for rates.

UBS reports that recent policy responses are centered on FX smoothing, liquidity support, and targeted fiscal aid—not direct monetary tightening. India has worked to smooth FX while buying bonds via open market operations and FX swaps; on the fiscal side, parliament approved about $24 billion in new net spending; Indonesia prioritizes currency stability and is intervening in both spot and NDF FX markets; Korea launched an around 20 trillion-won supplementary budget and fuel price cap, with the central bank also announcing about 3 trillion-won govvie purchases to stabilize markets.

UBS splits possible policy paths into three types: Singapore’s MAS might move first on growth grounds, with a greater probability of a steeper policy slope adjustment (0.5% p.a.) in mid-April; Korea, Malaysia, and the Philippines could see "calibrated" hikes in the second half if oil stays high, but "not the base case"; India, Thailand, and Indonesia—now in cutting/easing mode—are more likely to pause cuts than switch to hikes.

According to Goldman Sachs economists, several major central banks (Fed, ECB, BOE, BOJ, SNB, Riksbank, BOC) are all likely to keep rates unchanged this week—the only expected hiker is the RBA. The "lots of meetings but little action" theme contrasts sharply with aggressive market repricing.

Positioning Not Washed Out—“Capitulation” Sentiment Easily Reversed by Volatility

The dislocation between sentiment and positioning is another operational risk repeatedly flagged by the three institutions.

JPMorgan has observed that the market narrative quickly flipped from "buy the dip early in the conflict" to "bet on a protracted war, new oil highs, and a replay of 2022." However, technical signals and positioning data do not support that a full washout has actually occurred—major market RSI readings are still above 30, and most flows show reduced risk exposure rather than a widespread shift to net shorts. This sentiment "capitulation," in the Matejka team's view, actually raises the cost of continuing to chase shorts.

Goldman also notes that, compared with 2022, the market’s repricing for growth risks is now clearly insufficient: credit excess returns, cyclical vs defensive stock performance, and U.S. equities’ recession pricing have not reached "major trouble" levels; 10-year Treasuries and bunds have also seen much more restrained declines.

This structure has also undermined the effectiveness of equity-bond hedges. Goldman’s analysis shows the S&P 500’s beta to the U.S. 10-year real rate and breakeven inflation has clearly turned negative. This means rate volatility is no longer naturally positive for defensive allocations, and the importance of active hedging tools has increased.

JPMorgan’s view is: if a true "clearing moment" comes, it could be concentrated in a 2–3 day selloff, possibly coinciding with oil spiking toward $120–130, but afterwards, a reverse "risk-on" rally may run even further.

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The above content is from Chasing Wind Trading Desk.

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