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Shock Value

An oil supply crisis has sparked a repricing of rate expectations among major global central banks. But will central banks respond to a supply shock with rate hikes? We express skepticism about market pricing for four main reasons.

  • First, the standard economic framework suggests that current energy shocks are a “supply shock,” which central banks should “look through.”
  • Second, while we acknowledge the risks posed by the energy shock, global economies are on a completely different footing today than they were in 2022, as labor markets are weak.
  • Third, differing exposures to the Middle East oil shock suggest that central banks' reaction functions will also differ, with the U.S. and Canada facing the lowest exposure.
  • Fourth, central banks’ reaction functions will differ depending on their current policy stance. For the U.S. Fed and the Bank of England, which still have monetary policy rates in the restrictive territory, we think a prolonged energy price shock will dampen growth rather than drive up inflation, leading to more rate cuts than hikes in the U.S. and the U.K.

The bottom line is that a jolt to global bond markets from oil prices could present opportunities for discerning investors with a view that differs from what’s priced in. We don’t think central banks should hike into a supply shock, especially given that global economies in 2026 are in a vastly different shape than they were in 2022.

Click here to read the full note (Shock Value). Enjoy!