The narrative is shifting rapidly across markets. Investors were expecting further rate cuts in 2026, particularly from the Fed. This scenario was bolstered by fears of a deteriorating labor market caused by AI-related layoffs.

However, all of this was swept aside in just a single weekend. The conflict in the Middle East has sent energy prices soaring, and everyone now fears a return of inflation. In the markets, this is translating into a sharp rise in long-term rates. The US 10-year yield has gained about 25bp since the start of hostilities, while the Bund of the same maturity has jumped by almost 30 bp: the latter reached its highest level since late 2023 this morning.

Europe is indeed on the front line of this crisis. While the United States is energy independent, European countries need to import oil and LNG. The rise in long-term rates therefore reflects not only higher inflation expectations, but also an anticipation of additional spending by governments to mitigate the impact of rising energy prices on economies.

This context is reminiscent of 2022. An energy crisis following the outbreak of a conflict (Russia's invasion of Ukraine). A traumatic experience for central bankers. In 2022, they had considered inflation to be "transitory," thereby delaying rate hikes. This memory is particularly present at the ECB, where statements from various members suggest they will not hesitate to act in the face of any resurgence in inflation. Markets are now pricing in two quarter-point rate hikes for the ECB this year.

But central bankers must not forget that the situation is very different today. In 2022, rates were at zero, the economy was in a post-pandemic recovery phase, and the labor market was tight. All these elements contributed to the persistence of the inflationary shock, but they are no longer present in 2026.

Above all, it must be kept in mind that the rise in energy prices does not only have an inflationary impact; it is a stagflationary shock: more inflation and less growth. Indeed, higher prices destroy demand. On this subject, see the paper by my colleague Thomas Barnet, who explains the concept of stagflation in detail.

This is obviously the worst situation for central banks. Raising rates risks further slowing an economy already under pressure. Lowering them supports the economy but fuels inflation.