Global rate hikes are moving back to the centre of financial markets as the ECB has already raised its deposit rate to 2.5%, while investors are pricing a high probability of increases from the Federal Reserve and Bank of Japan this week. The shift comes as higher energy prices add to inflation pressure and push government bond yields higher.
Fed, ECB and BOJ Rate Outlook
The Federal Reserve is due to decide on rates on Wednesday, with markets pricing roughly 85% to 90% odds of a hike, according to CME FedWatch and Kalshi. The Bank of Japan is scheduled to decide on Friday, with markets pricing a 98% probability of an increase.
Rate expectations have changed sharply. Markets had been pricing four cuts nine months ago, but now expect four hikes by mid-2027. Analysts describe the shift as the most hawkish rate outlook since 2022.
The benchmark US 10-year Treasury yield moved above 5% on Monday for the first time in nearly three years. August US CPI accelerated, adding to expectations of tighter monetary policy. The US 10-year TIPS yield also reached 2.622%, its highest level since 2008.
Energy Prices Add to Inflation Pressure
European policymakers are increasingly concerned about the impact of higher energy costs. ECB policymaker Peter Kazimir said eurozone inflation could exceed already elevated projections, while ECB board member Isabel Schnabel described energy-price trends as “quite concerning.”
Dutch TTF natural gas prices crossed €80/MWh last week, reaching a three-year high. Brent crude gained about 8% during the week and oil prices have moved above $100 a barrel amid Middle East supply disruptions.
North Macedonia cut fuel VAT from Monday, Cyprus extended tax cuts and Greece is considering heating-oil subsidies ahead of winter.
Oil Supply Disruptions Hit Asian Markets
Asian refiners are still waiting for guidance from Saudi Aramco on whether crude loadings from the Red Sea port of Yanbu will resume. At least four processors said they had received no official guidance.
The East-West pipeline shutdown has added to supply constraints after Houthi blockade threats reduced Yanbu loadings from around 6 million barrels per day in June to below 1 million barrels in July. Gulf-to-Asia tanker rates have reached record highs, while refiners expect stronger competition for sour crude from Iraq, the UAE and other producers.
Saudi Arabia has provided no timeline for restarting the pipeline, which was shut after Friday’s drone attacks. The disruption has also intensified pressure on emerging markets. The MSCI emerging-market equities index fell for a third consecutive session, while the South Korean Kospi declined sharply. The Thai baht and Philippine peso were among the biggest Asian currency losers.
India Inflation Adds to Rate Concerns
India’s retail inflation rose to 4.82% in August from 4.45% in July, staying above the Reserve Bank of India’s 4% target for a third consecutive month. Wholesale inflation climbed to 9.92%, with higher fuel and power prices linked to elevated crude oil costs.
RBI minutes showed Governor Sanjay Malhotra supported a rate hike if inflation broadened. The August inflation data has increased concerns around that condition.
Bitcoin has also fallen to around $78,000 amid tightening fears, with analysts warning that higher US yields and a stronger yen could accelerate carry-trade unwinds. Indian and Chinese buyers are competing for Persian Gulf crude, with PetroChina and Indian Oil Corp. leading early-September buying that pushed Dubai futures to their highest level since May 2026.
China’s Sinopec and CNOOC face margin pressure from domestic price caps, although China’s 1.4 billion barrels of stockpiles provide a strategic buffer.
Q1. What are markets expecting from the Fed this week?
Markets are pricing roughly 85% to 90% odds of a Federal Reserve rate hike on Wednesday, according to CME FedWatch and Kalshi.
Q2. When is the Bank of Japan expected to decide on rates?
The Bank of Japan is scheduled to make its rate decision on Friday, with markets pricing a 98% probability of a hike.
Q3. Why are energy prices increasing inflation concerns?
Higher natural gas and crude oil prices are adding to inflation pressure, with Dutch TTF gas above €80/MWh and oil prices above $100 a barrel.
Q4. What happened to the US 10-year Treasury yield?
The benchmark US 10-year Treasury yield moved above 5% on Monday for the first time in nearly three years.
Q5. What was India’s inflation rate in August?
India’s retail inflation rose to 4.82% in August from 4.45% in July, while wholesale inflation increased to 9.92%.
