Oil prices surged overnight, sharply increasing the probability of interest rate hikes by the Bank of England and the European Central Bank? Energy shock reshapes interest rate expectations

Overview

Oil prices soared overnight, causing a surge in the probability of rate hikes by the Bank of England and the European Central Bank? The market is revisiting this issue, not because a single day's oil price increase is enough to force immediate central bank action, but because the recently easing inflationary pressures in Europe could be hit again by energy supply risks.

From July 13 to 14, Brent crude briefly rose back above $85 per barrel. According to Reuters global market coverage, Brent crude rose about 2.6% to $85.49 per barrel, hitting a one-month high. This followed broader price fluctuations driven by escalating US-Iran conflict and heightened shipping risks in the Strait of Hormuz.

Bond markets quickly adjusted their rate expectations. The UK two-year gilt yield rose to approximately 4.35%, a one-month high, with traders fully pricing in a 25-basis-point rate hike by the Bank of England for November, earlier than previously anticipated. Eurozone government bond yields also rose, reflecting the market's increasing risk assessment for further policy tightening by the European Central Bank.

However, "surge in rate hike probability" more accurately describes the direction of market pricing rather than a decision already made by central banks. Energy prices must remain persistently high and further transmit to core inflation, wages, and service prices to convert short-term market shocks into genuine monetary policy action.

Key Points

Brent crude rose back above $85 per barrel, with markets concerned about renewed escalation in shipping through the Strait of Hormuz and Middle East supply risks.

The UK two-year gilt yield hit a one-month high, with the market fully pricing in a 25-basis-point rate hike by the Bank of England as early as November.

The ECB had already raised rates in June 2026 and raised its full-year inflation forecast to 3.0%, with energy prices being a key driver.

The Eurozone market had previously priced in only about a one-third probability of a July rate hike, but the new oil price surge has increased the possibility of earlier action.

Oil price increases primarily affect headline inflation. Whether they trigger rate hikes depends on their duration and the secondary transmission to wages, services, and inflation expectations.

The UK is particularly sensitive to energy shocks because gas and electricity price caps, the pound's exchange rate, and wage pressures could compound inflation.

For the crypto market, the real risk isn't oil prices themselves, but higher inflation delaying easing, pushing up real interest rates, and compressing global liquidity.

Why Did Oil Prices Surge Overnight?

The direct trigger for the latest oil price surge was the renewed escalation of the US-Iran conflict and renewed concerns over shipping safety in the Strait of Hormuz.

According to Reuters market report from July 14, the US announced a strengthening of its blockade measures against Iranian shipping and proposed charging freight fees for vessels passing through the Strait of Hormuz. These developments pushed Brent crude above $85 a barrel, with US and European bond yields rising in tandem.

The oil price increase doesn't just reflect supply disruptions that have already occurred. Crude oil futures also price in insurance premiums, shipping costs, transit times, inventory management, and potential supply cut-off risks in advance. Even without an equivalent drop in actual export volumes, the risk premium can quickly return to oil prices as long as traders perceive higher uncertainty in key shipping lanes.

Why Does the Strait of Hormuz Affect Global Inflation?

The Strait of Hormuz connects the Persian Gulf with the Arabian Sea and is a crucial chokepoint for global oil and LNG transportation. A significant portion of energy exports from Iran, Saudi Arabia, the UAE, Kuwait, Iraq, and Qatar passes through this region.

When shipping is threatened, the price impact extends beyond crude oil itself to:

Marine insurance and shipping costs;

Diesel, gasoline, and jet fuel prices;

European gas and electricity markets;

Chemicals, plastics, agriculture, and logistics costs;

Corporate inventory and supply chain arrangements.

Europe, being a net energy importer, is more susceptible than the US to the dual impact of international oil and gas prices and exchange rates.

Risk Premiums Enter Prices Faster Than Actual Supply Disruptions

Energy markets typically complete their first round of repricing before an actual supply interruption occurs. Traders need to assess in advance whether ships will reroute, whether insurers will raise premiums, and whether energy companies will increase inventories.

This also explains why oil prices can fluctuate significantly in a short period. If tensions ease, risk premiums can also dissipate quickly. In late June, a rapid decline in oil prices led some ECB officials to believe there was no urgency for another rate hike.

According to a Reuters report from June 30, market pricing for an ECB rate hike in July was only around one-third at the time, with the next full rate hike not fully priced in until October. The current oil price rebound means this accommodative assessment needs re-evaluation.

Has the Probability of a Bank of England Rate Hike Really Surged?

The hawkish repricing is most pronounced in the UK market.

According to a Reuters report on the UK gilt market, the UK two-year gilt yield rose to 4.349% on July 13, its highest in a month. The interest rate market has fully priced in a 25-basis-point rate hike by the Bank of England for November, earlier than the previously expected December.

The two-year gilt yield is particularly sensitive to central bank policy expectations. A rapid rise in the yield indicates that investors are demanding higher returns to compensate for future rate increases and persistent inflation risks.

Where Does the Bank of England Currently Stand?

The Bank of England held its benchmark rate at 3.75% at its June meeting. According to the Bank of England's June 2026 Monetary Policy Meeting minutes, two of the nine Monetary Policy Committee members supported an immediate 25-basis-point rate hike.

The Bank of England forecasted inflation to be slightly below 3% in Q3 2026 and rising to slightly above 3.25% in Q4. This forecast used energy price paths as of June 15, and the latest oil prices have risen again.

If energy prices remain persistently higher than the original assumptions, the Bank of England could raise its inflation forecast in the next Monetary Policy Report scheduled for July 30, or at least strengthen its warnings about secondary transmission risks.

Why is the UK More Vulnerable to Shocks Than the Eurozone?

The UK economy's sensitivity to energy shocks stems from multiple channels.

First, international oil price increases quickly transmit to gasoline, diesel, and transportation costs. Second, gas and electricity prices impact household bills with a lag through the Ofgem energy price cap. Third, if the pound weakens due to safe-haven capital flows, the domestic currency cost of imported energy will rise further.

UK services inflation and wage growth are also relatively sticky. The Bank of England's real concern isn't a one-off oil price shock, but businesses passing on energy costs to consumers, workers demanding higher wages, and the subsequent formation of a longer cycle between wages and service prices.

Full Pricing Doesn't Equal a Determined Rate Hike

The market 'fully pricing in' a November rate hike means that interest rate swap prices broadly reflect a 25-basis-point tightening, not that the Bank of England has committed to action.

If oil prices fall again, the labor market cools significantly, or core inflation continues to decline, the market could still pull back its rate hike expectations. The Bank of England could also achieve a similar tightening effect by maintaining the 3.75% rate for a longer duration without an immediate hike.

Therefore, the latest change is more accurately described as: a Bank of England rate hike has transformed from a tail risk into one of the market's baseline scenarios.

Will the ECB Raise Rates Again Sooner?

The ECB's policy starting point differs from the Bank of England's. The ECB had already raised its key interest rate by 25 basis points in June, bringing the deposit facility rate to 2.25%, in an attempt to preemptively control the spread of energy shocks to core inflation.

According to the ECB's June monetary policy decision, Eurosystem staff project average Eurozone headline inflation at 3.0% in 2026, 2.3% in 2027, and back to 2.0% in 2028. Inflation excluding energy and food is projected at 2.5% for both 2026 and 2027.

The ECB explicitly stated that the upward revision to inflation projections for 2026 and 2027 compared to March was primarily due to a higher energy price path, and it expects energy costs to partially pass through to food, goods, and services prices.

A July Rate Hike is Still Not a Foregone Conclusion

Following the rapid decline in oil prices earlier, the market had reduced the probability of a July rate hike to about one-third. Several ECB officials advocated waiting for more data to avoid overreacting to potentially temporary energy fluctuations.

However, the latest oil price rebound has reintroduced uncertainty around the July meeting. If Brent crude remains above $85, European gas prices rise in tandem, or inflation expectations increase again, members supporting an earlier rate hike will have a stronger basis.

According to a Reuters report on ECB policy discussions, policymakers like Bundesbank President Joachim Nagel had previously stated that the ECB must retain the capacity for further action if the inflation dynamic deteriorates.

The ECB is More Likely to Focus on Secondary Transmission

The ECB cannot increase global oil supply. Raising interest rates won't restore normal shipping through the Strait of Hormuz. Therefore, monetary policy will not mechanically react to every oil price increase.

What the central bank is primarily watching for is:

Whether energy prices persist for months, not just days;

Whether consumer inflation expectations become unanchored from the 2% target;

Whether businesses broadly raise prices for goods and services;

Whether wage growth re-accelerates due to rising living costs;

Whether euro depreciation further amplifies imported inflation.

If the shock only pushes up headline inflation for a few months, the ECB might stay on hold. The possibility of further rate hikes would only increase significantly if energy prices start driving up core inflation and wages anew.

The Eurozone Faces a Stagflationary Trade-off

Rising energy prices both push up inflation and reduce household real income, corporate profits, and industrial output. For the ECB, this creates a classic stagflationary dilemma.

Raising rates can suppress secondary inflation but cannot solve the energy supply problem and may further weaken growth. Conversely, if the central bank completely ignores the energy shock, inflation expectations could become unanchored again.

Consequently, the ECB is likely to favor a meeting-by-meeting approach rather than pre-committing to a sequence of consecutive rate hikes.

How Do Oil Price Increases Transmit to UK and Eurozone Inflation?

Crude oil prices do not directly feed into the Consumer Price Index at the same proportion. The speed and magnitude of transmission depend on tax structures, exchange rates, corporate profit margins, government subsidies, gas prices, and wage reactions.

First-Round Impact Comes from Fuel and Transport

Gasoline, diesel, and jet fuel usually reflect changes in crude oil prices first. Rising transportation costs subsequently impact food, retail, travel, aviation, and logistics services.

Because fuel prices are frequently encountered by consumers, even their limited weight in the inflation basket can quickly alter public perceptions of future price movements.

Second-Round Impact Determines Whether Central Banks Act

Central banks can typically tolerate temporary increases in headline inflation, but they find it difficult to tolerate energy shocks transforming into persistent core inflation.

For example, restaurants might raise prices due to higher energy and transport costs, and employees might demand higher wages due to increased living costs. Wage increases further elevate service sector costs, preventing inflation from declining rapidly even after oil prices fall.

This is why the Bank of England and the ECB repeatedly emphasize wages, service prices, and inflation expectations.

Base Effects Can Amplify Annual Inflation

Consumer inflation is usually measured year-on-year. If oil prices were low in the same period last year but rise rapidly this year, the annual energy inflation rate can increase significantly, even if current prices do not continue to rise.

Central banks need to distinguish between statistical base effects and genuinely persistent price pressures. Markets, however, often trade on the most direct year-on-year impact first, so bond yields and rate hike probabilities can change before official data is released.

What Does the Oil Price Shock Mean for Stocks, Bonds, and the Crypto Market?

An oil price increase changes more than just energy asset pricing; it also affects bond yields, equity valuations, exchange rates, and global liquidity.

Short-Term Government Bonds Face Rate Hike Pressure

UK two-year gilts and German short-term bonds are most sensitive to changes in policy expectations. When the market raises the probability of rate hikes, short-term yields typically rise, and bond prices fall.

Long-term government bonds are simultaneously influenced by inflation, growth, fiscal policy, and safe-haven demand. If the market believes the energy shock will persistently push up inflation, long-term yields might also rise. If investors are more concerned about a recession, safe-haven demand could limit yield increases.

Energy Stocks and Consumer Stocks Diverge in Performance

Oil and gas producers may benefit from higher energy prices, but airlines, transportation, chemicals, manufacturing, and consumer-facing companies face cost pressures.

Within major European stock indices, gains in energy companies can sometimes buffer overall market declines, but small and medium-sized enterprises and domestic demand sectors are more susceptible to the dual blow of increased financing costs and rising input costs.

The performance of bank stocks depends on whether the improvement in net interest margins from rate hikes can offset the risks of an economic slowdown and credit losses.

The Pound and Euro May Not Necessarily Rise on Rate Hike Expectations

Theoretically, higher rate expectations might support a currency. However, if oil price increases worsen the terms of trade, dampen growth, and raise energy import costs, the pound and euro could also come under pressure.

Currency markets will ultimately weigh two opposing forces: the yield advantage from higher rates versus the economic damage caused by the energy shock.

Crypto Assets Face Liquidity Dynamics, Not Oil Itself

Bitcoin and other crypto assets do not directly consume large amounts of oil, so the impact of oil prices on them primarily comes through macroeconomic channels.

When oil prices push up inflation, central bank rate hike probabilities, and real government bond yields, the opportunity cost for investors holding volatile assets increases. Tighter dollar liquidity and higher leverage costs can also suppress crypto market valuations.

On the other hand, if the energy conflict triggers capital controls, payment disruptions, or sovereign risk, Bitcoin might also attract some demand as a non-sovereign asset. These two forces can exist simultaneously, and short-term performance depends on whether the market focuses more on liquidity tightening or geopolitical safe-haven seeking.

Readers interested in observing the interplay between commodities, interest rates, and crypto assets can track related market changes via MEXC.

View MEXC Commodity & Crypto Cross-Asset Trading Opportunities Now

Which Data Points Deserve the Most Attention Next?

Whether the market continues to increase the probability of UK and Eurozone rate hikes will depend on whether oil prices persist and whether inflation data confirms secondary transmission.

Brent Crude and European Natural Gas Prices

A brief break above $85 has a completely different meaning for central banks compared to oil prices remaining elevated for several weeks. Investors should also monitor European natural gas prices, as gas has a more direct impact on European electricity, industrial costs, and household energy bills.

If crude oil rises but gas remains stable, the inflation shock in