The interest rate market chooses optimism, betting that the Iran war will last "only a few weeks, not months."

After the United States and Israel launched strikes against Iran, the global interest rate market is making a key judgment: **the conflict will end within weeks rather than becoming a protracted war**. While this optimistic outlook is preventing the market from heading toward the worst scenario, the sharp rise in energy prices has begun to reshape monetary policy expectations in the UK, the Eurozone, and the US. According to CCTV News and Xinhua News Agency, the United States and Israel launched large-scale joint military strikes against Iran on February 28. On March 5, media reports stated that following last weekend’s military actions, oil transit through the Strait of Hormuz plummeted to a trickle, and Iran's threats of retaliation have halted shipping. Energy prices for oil, natural gas, and others have surged, with natural gas prices doubling since last weekend. Neil Crosby from commodities research institution Sparta warned: “Forget about oil surpluses — the market is directly confronting a huge gap in the global oil market right now.” Despite this, the market currently chooses to believe the conflict will be short-lived. **The probability of a rate cut by the Bank of England in March plunged from 75% to 25%, the probability of a rate hike by the European Central Bank this year rose to 20%, while the Fed’s rate cut trajectory remains largely unchanged—markets bet Trump has enough political motivation to keep the conflict short-term.** However, multiple economists have made it clear that, **if the situation drags on for months, inflationary pressures will substantially alter the pace of rate cuts and could even spell the end of the current easing cycle.** ## Bank of England: March rate cut nearly ruled out This conflict has had the most direct impact on UK monetary policy expectations. Just a week ago, markets were betting with a 75% probability that the Bank of England would lead with a rate cut at its March meeting; now, the probability is down to 25%. Paul Dales of Capital Economics said the surge in natural gas prices is the core variable. "Natural gas prices have doubled since last weekend, but the key is how long high prices will last and when they’ll start affecting inflation." He currently maintains a forecast of three rate cuts this year, but adds, **“If the situation persists, it’s only a matter of time before we adjust our forecast.”** He also pointed out that the March meeting is only weeks away; "Without clear signs of de-escalation, I think the Bank will skip the anticipated rate cut this time." **Sanjay Raja from Deutsche Bank offered a more specific quantitative estimate:** Current oil prices would have a direct impact of about 10 to 15 basis points on CPI; if natural gas prices remain high for months, the average energy bill for typical dual-fuel users could rise about 18%, to £1,900 per year. He also noted that the price cap period is just beginning; if the Middle East situation calms within weeks, there is still room for adjustment. **Raja further suggested a possible “hawkish rate cut” scenario:** If the market pricing for a March rate cut rises above 40%, the Monetary Policy Committee might opt for a “precautionary” rate cut, but at the same time release more cautious forward guidance. This could mean the easing cycle ends early and terminal rate expectations are pushed higher. ## European Central Bank: Calm disrupted, rate hike chances appear The outbreak of the Iran war has broken the calm the European Central Bank has maintained since last summer. Previously, analysts were almost unanimous in expecting Eurozone rates to remain in the 2% “comfort zone” this year and next; now, the forward rate market is pricing a 20% chance of a rate hike by the ECB this year. Eurozone inflation data shows overall inflation at 1.9% in February, slightly below target. But analysts noted that the possibility of below-target inflation this year has now shifted to a risk of overshooting due to the Middle East situation. However, several analysts believe the Eurozone's resilience this time is stronger than during the 2022 Russia-Ukraine war. Marco Valli of UniCredit said: > “The resilience of the Eurozone economy over the past year exceeded expectations. Compared with 2022, energy supplies are more diversified and the ability to withstand shocks is higher. The global energy market was in surplus before this crisis, which also helps. Inflation is slightly below target, so the ECB has breathing room and can observe for now.” Pantheon analysts warned, however, that the spike in energy prices will dampen consumer and business confidence at the same time, threatening already uncertain growth prospects. They expect the ECB will not raise rates in the short term. ## Federal Reserve: Political logic supports market optimism Compared to the UK and Eurozone, expectations for Fed policy have been affected the least. The forward rate market still almost fully prices in two rate cuts in 2026, with only minor hawkish sentiment seeping in — last week markets priced in a small chance of a third cut, now that has faded, but there’s no turn toward “no rate cuts.” Analysts believe Trump’s political interests are the key logic supporting this optimistic outlook. Bernard Yaros of Oxford Economics said: > “The Fed will choose to ignore the price increases brought by the Iran conflict while remaining alert to its impact on growth. Consumers are already under pressure, real income growth is stagnating, and higher energy prices will only make things worse.” Analysts generally believe that with midterm elections approaching, any inflation rebound or decline in consumer purchasing power would bring political pressure on Trump, giving him a strong motive to end the conflict quickly. **Goldman Sachs analysts provided a quantitative assessment from an economic model perspective:** Their oil consumption model shows rising oil prices will drag down Q4 2026 GDP year-on-year growth by about 0.13 percentage points, mainly through reducing household real disposable income; but increased capital spending in the energy sector will partially offset this drag, with a net drag of about 0.1 percentage points overall. ## Core variable: Duration of conflict All divergences in current monetary policy expectations ultimately boil down to the same question: How long will the war last? The market’s baseline scenario is that the conflict will end within weeks. Should this expectation fail, the policy dilemmas faced by central banks will sharply deepen—**the Bank of England may have to suspend the entire rate cut cycle, the probability of a rate hike by the ECB will further increase, and the Fed will have to find a new balance between inflation pressures and slowing growth.** As Capital Economics’ Dales said, **the key difference from 2022 is:** back then central banks chose to raise rates to cope with energy shocks, whereas now labor market slack means rates are more likely to “stay put” rather than “rise again”. But in any case, whether the market’s optimistic bets pay off depends on geopolitical developments, not economic data itself. Risk Warning and Disclaimer The market involves risks, and investment should be cautious. 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