Financial markets worldwide may see some recovery following recent geopolitical developments, but experts warn they’re unlikely to return to conditions seen before the latest Middle East tensions, as energy costs and inflation pressures are expected to persist.
A ceasefire agreement between the United States and Iran was announced late Tuesday by President Donald Trump, establishing a two-week suspension of military actions. The deal requires Iran to reopen the Strait of Hormuz and guarantee safe passage for commercial vessels.
The announcement immediately caused oil prices to drop while stock and bond markets experienced gains across the globe.
Financial analysts note that earlier expectations for interest rate reductions in major economies including the United States, Britain, and Norway have been abandoned and are unlikely to return. Some experts suggest the ceasefire might actually increase the probability of higher rates, since severe oil supply disruptions that could slow economic growth appear less likely.
The recent energy crisis has brought inflation concerns into sharp focus, demonstrating how major world economies have struggled for years to bring inflation back to desired levels, according to market analysts.
Bond investors have faced significant challenges as a result. The FTSE World Government Bond Index dropped more than 3% during March, marking its steepest monthly decline in eighteen months.
Andrew Lilley, who serves as chief rates strategist at Sydney-based investment firm Barrenjoey, explained the market shift: “Sometimes these events, even when unwound, have changed the psyche of what the likely next move is for most central banks.”
“This temporary oil price shock has brought investors closer to the truth, which is that actually inflation has been persistently high for the last three years,” Lilley added.
Energy security concerns continue to create uncertainty, with oil prices reaching record levels this week and remaining elevated due to supply constraints. A recent survey conducted by Central Banking Publications found that more than two-thirds of central banks consider geopolitical risks their primary concern.
Central banks in India and New Zealand maintained their current interest rates on Wednesday at 5.25% and 2.25% respectively, while indicating future increases may be necessary.
The Reserve Bank of New Zealand stated: “The balance of risks has shifted, and there are likely to be differences between the near term and medium term. Any signs of significant second-round inflationary effects or increases in medium-term inflation expectations would require decisive and timely increases in the OCR to re-anchor inflation expectations.”
Markets responded positively to the ceasefire news, with stocks climbing, the dollar weakening, and Brent crude oil futures dropping below $100 per barrel for the first time in two weeks.
Treasury bonds and markets in Europe, Britain, and Australia also saw strong gains. However, yields only returned to mid-March levels, with 10-year Treasury yields at 4.85% and two-year yields at 3.72%, roughly matching current Federal Reserve rates.
While some analysts believe stocks could continue rising if peace is maintained, they expect short-term yields to face difficulty declining further as policymakers have limited room for rate cuts.
Federal funds futures, which had anticipated two U.S. rate cuts for 2026 at the beginning of the year, now suggest only a 50% probability of a single reduction.
Prashant Newnaha, senior rates strategist at TD Securities in Singapore, emphasized central bank vigilance: “Central banks will be on high alert that this supply shock does not feed into higher inflation expectations. Rate cuts should be off the table.”
Japan appears positioned for rate increases as well, with the ceasefire reducing concerns about Gulf energy supplies that the country depends upon.
Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo, noted: “The BOJ was totally willing to raise rates without this Middle East uncertainty. And now this ceasefire will give a good reason for them to go ahead and raise rates in April. All the other conditions, including wages and inflation, were all met already.”
Even China, which has historically faced deflationary pressures, is seeing global investment banks withdraw previous predictions for rate cuts this year.
While bonds could see some recovery, particularly following heavy March selling and aggressive positioning that anticipated rate increases in Europe and Britain, the reduced recession risk from the ceasefire has policymakers moving away from rate cuts toward a more cautious approach.
As Indian central bank Governor Sanjay Malhotra stated Wednesday: “Risks are on the upside.”
