Investors are betting central banks will raise interest rates in response to the Iran war, as energy price shocks trigger a dramatic reassessment of previous expectations for further cuts. The European Central Bank is now expected to lift its key rate once or twice this year as soaring oil and gas prices reignite inflationary pressures, according to swaps contracts.

A rate increase from the Bank of England is also viewed as possible by year-end, marking a sharp turnaround from the rate cuts priced in before the conflict. Investors have dialed back expectations for further US Federal Reserve rate reductions, with just one or two quarter-point cuts priced into futures markets, down from two or three before the conflict began.

Those bets reflect a belief that policymakers have learned bitter lessons from the inflationary surge that followed Russia's 2022 invasion of Ukraine, when most central banks were seen as too slow to respond. The Bank of England has been overhauling its forecasting and communications, informed by an excoriating report by former Fed chair Ben Bernanke in 2024, placing greater emphasis on how it might react to potential scenarios rather than its central forecast.