Traders Bet on Four Rate Hikes as Energy Prices Surge to Triple Digits

Traders are betting on four interest rate hikes by the European Central Bank (ECB) and the Bank of England (BoE) over the next two years, as Brent crude returns to triple-digit levels.

The swap market pricing indicates that the ECB is expected to cumulatively raise interest rates by approximately 90 basis points each by December 2027. This implies that policymakers may need to implement three 25-basis-point rate hikes during this period, with the probability of a fourth hike reaching 60%.

Similarly, the Bank of England is also expected to raise interest rates by approximately 90 basis points, potentially pushing the benchmark rate to its highest level since February 2025.

The market's aggressive bets on ECB rate hikes are driven by concerns about inflation spikes triggered by conflicts in the Middle East and the high correlation between energy prices and economic performance in Europe and the UK. Lauren van Biljon, Senior Portfolio Manager at Allspring Global Investments, noted that 'oil prices have broken back above $100 per barrel, and it is evident that the United Kingdom and Europe are highly correlated with energy prices.'

However, some analysts caution that market bets on interest rate hikes before the end of 2027 may be excessive. Joachim Nagel, a member of the European Central Bank's Governing Council and President of the Bundesbank, has signaled a potential rate hike for Thursday but remained cautious regarding the subsequent policy path.