Gas prices soar and rewrite expectations: the market speculates that the European and British central banks will shift to raising interest rates, causing a sudden change in policy outlook.

Just hours before the Bank of England and the European Central Bank were set to announce their latest interest rate decisions, the threat of an energy crisis prompted traders to bet that both institutions would further raise rates. An Iranian attack on the world's largest liquefied natural gas export facility caused gas prices to spike, reigniting market concerns about inflation and prompting traders to bet that central banks would take more aggressive measures in response. The currency markets currently expect the European Central Bank to raise rates by more than twice in 2026 (each time by 25 basis points), while traders' bets on the Bank of England tightening monetary policy by the end of the year have risen by about 40 basis points since Wednesday. Although the market generally expects interest rates to remain unchanged today, investors will closely watch officials' policy statements to see how conflicts have affected their outlook. For Bank of England Governor Andrew Bailey and European Central Bank President Christine Lagarde, this is a tricky backdrop. The latest surge in gas prices is likely to render many of their recent discussions with colleagues outdated, while also increasing pressure on them to explain whether the current expectations for rate hikes are justified. "There have been many events overnight that have pushed up natural gas prices," said Nomura International's senior European economist, Angelei Sotchapaniak. "Such movements in rate expectations immediately before central bank announcements are very rare, but we are in a very rare period." Less than three weeks ago, the market was highly confident that today's European Central Bank meeting would be uneventful, with decision-makers expected to stand pat for the year. Meanwhile, due to a weak labor market, the market widely expected the Bank of England to announce a rate cut today. But the Middle East conflict and global energy and trade disruptions have disrupted these expectations. Brent crude oil broke through $118 per barrel on Thursday, with energy-importing countries in Europe and the UK particularly affected. European bonds fell across the board, with shorter-dated bonds closely related to central bank rate expectations experiencing the largest declines. The UK's two-year government bond yield rose 15 basis points to 4.25%, hitting a near one-year high; Germany's two-year government bond yield rose 8 basis points to 2.52%. Francesco Pesole, strategist at Holland International Group, said the "hawkish reassessment" in the euro short-term interest rate market means that "even subtle hints could have an amplified impact on short-term rates". "To match the current pricing, some guidance is needed, and we doubt the European Central Bank is ready to provide that guidance yet."