The risk of an overreaction by central banks to the energy crisis
26 MAR, 2026
By Axel Botte
By Axel Botte, Chief Market Strategist at Ostrum AM, an affiliate of Natixis IM
Markets appear to be testing the resolve of central banks to curb inflation stemming from the oil crisis. The specter of 2022 looms, but there are also fears that the mistakes of 2011 could be repeated.
Iranian attacks on LNG production facilities in Qatar have eliminated 17% of global production. The damage is significant, and reconstruction could take three to five years. Hopes of bypassing the Strait of Hormuz via Saudi Arabia, Iraq, and Turkey have been thwarted by these targeted attacks. Although several countries have offered security guarantees, tensions remain high. Central banks are increasingly concerned about inflationary risks, and revised forecasts for official interest rates are weighing on risk assets. The dollar strengthens with each escalation of tensions.
Last week was marked by central bank meetings. The Fed held interest rates, citing risks of rising inflation (forecast at 2.7% by the end of 2026), and even revised growth forecasts upward despite labor market fragility. However, the U.S. economy is less exposed to this crisis due to its energy surplus. The FOMC is expected to remain firm for several months before resuming monetary easing.
In the eurozone, the ECB acknowledged the inflationary risk in response to rising inflation break-even points. Some policymakers have suggested tightening as early as April, but the current situation differs significantly from 2022, when expansionary policies, pent-up consumer demand, and multiple disruptions created an explosive inflationary cocktail. The ECB must avoid overreacting.
The memory of 2011 also haunts markets: two rate hikes in response to rising oil prices led to a bond market drop. Although there is no banking crisis today, the possibility of monetary policy errors still exists.
The Bank of England voted unanimously to keep rates unchanged, abandoning the accommodative guidance it had maintained. Markets have ruled out two rate cuts and now anticipate three hikes in 2026. The high proportion of variable-rate debt in the UK economy could trigger a premature slowdown, making Andrew Bailey’s efforts to temper expectations understandable.
The Bank of Canada, after weak employment data, seems among the more moderate, along with the Riksbank, given low inflation in Sweden. In contrast, the Reserve Bank of Australia (RBA) remains committed to its rate-hiking cycle started in February and continued in March. The Bank of Japan’s stance remains enigmatic, but committee votes point to a restrictive bias for April.
Amid this energy crisis, equity markets experienced a sharp decline toward the end of the week. Markets appear to be testing central banks’ commitment to curbing price pressures. Expected rate hikes are translating into higher long-term yields, leading to a notable flattening of the yield curves.
- The U.S. Treasury bond is heading toward 4.40%
- The Bund has surpassed the 3% barrier
- The Gilt struggles to stabilize around 5%
Amid the turmoil, the 30-year German bond remained stable at 3.53%. Sovereign spreads are under pressure again. The BTP is particularly affected, likely due to its greater dependence on natural gas. Credit spreads are widening moderately, reacting less severely than equities or volatility.
