Germany’s 10-year Bund yield has risen back to 2.9%, its highest level since January 23, as investors increasingly factor in a more hawkish European Central Bank in response to renewed inflation pressures. Escalating geopolitical tensions linked to the conflict involving Iran have pushed energy prices higher, reviving inflation concerns and prompting markets to reconsider the scope for monetary easing.
Although oil prices have retreated from peaks above $100 per barrel, the earlier spike has already had a substantial impact on interest rate expectations. Money markets now anticipate an ECB rate hike later this year, a sharp reversal from the modest probability of a rate cut that prevailed before the conflict. On Tuesday, Christine Lagarde reiterated that the ECB is prepared to take all necessary steps to keep inflation in check, despite the current pressures from higher energy costs.
