Global markets are suddenly pricing in a rate hike in April, with hawkish signals emerging from the EU, the U.S., and Japan—how will this reshape current financial market pricing logic?

There exists an extreme path within demand-driven cyclical models: 'stagflation first, then deflation, followed by depression, and finally recovery.' Historically, traces of this pattern have appeared—logically, supply-side hard shocks tend to trigger stagflation; an extreme collapse in demand may lead to deflation; and deflation叠加 debt crises could spiral into depression. Yet these three phases do not form a linear or inevitable chain, nor has history ever witnessed their full sequential completion—not even during the combined geopolitical and monetary crises of the 1930s and 1970s. Nevertheless, we cannot deny that today’s markets differ profoundly from those of the past. Global productivity, supply-chain architecture, geopolitical frameworks, monetary systems, debt levels, labor-market structures, and supply-demand dynamics have all undergone substantial transformation. Moreover, the dual pressure of AI-driven capital hunger and escalating geopolitical risks is actively reshaping demand patterns and commercial logic—and redefining markets’ sustainable safety margins. Consequently, the effectiveness of global policy tools may be steadily eroding. The conventional model—'overheating → inflation → rate hikes → mild recession → rate cuts → recovery'—is now under severe strain. A critical factor here is the shrinking room for policy maneuverability. Surging gold prices and speculative bubbles further constrain this space. Hence, sharp declines in international precious metals, heightened dollar volatility, steep corrections in equity markets of production-oriented economies, and renewed upward pressure on debt yields all signal that global capital is urgently demanding central banks preserve the efficacy of monetary instruments—ensuring that, while monetary policy remains effective, the above cycle is reversed during the recession phase itself, preventing any slide into depression. This article is exceptionally long—nearly 4,000 characters—so please feel free to select the sections most relevant to your interests! Yet the extreme scenario I outlined earlier remains genuinely possible. In 2025, humanity created the largest financial-market bubble in history. By March 2026, as Middle Eastern geopolitical tensions intensified and international oil prices surged to nearly USD 110 per barrel, structural inflation in major economies morphed into broad-based global inflation. The previously consensus-driven expectation of a 'global synchronized easing cycle' abruptly reversed. The U.S. Federal Reserve, the Bank of Japan, and the European Central Bank—all three core economies—simultaneously issued hawkish monetary policy signals. Market expectations for a rate hike at the April policy meeting are rapidly intensifying. Global financial markets’ pricing logic is undergoing a fundamental restructuring—amplified by supply shocks from Middle Eastern instability and structural divergence driven by the AI industrial wave. Consequently, major global asset classes are inevitably headed toward another round of significantly larger, repricing-driven volatility. Next, let me analyze the following: I. From Consensus Easing to Rate-Hike Reversal: A Collective Shift in Central Bank Policy Here, I focus primarily on Western economies. Although China’s CPI has risen and its PPI/PMI contraction has moderated, manufacturing-sector pressures remain acute—making countercyclical policy highly likely (e.g., Western rate hikes coinciding with China holding steady—or even cutting rates and reserve requirements). I won’t elaborate further on this point here. (1) The U.S. Federal Reserve: Rate-cut expectations fully erased; rate-hike probability quietly rising At the March FOMC meeting, the Fed held rates steady as expected—but Chair Powell explicitly stressed that, even before the outbreak of the Iran war, the persistence of U.S. inflation had already far exceeded policymakers’ prior expectations. Earlier, Fed Governor Cook warned that AI-driven labor-market restructuring could trap monetary policy in a dilemma: rate cuts would neither effectively address structural challenges nor avoid fueling inflation.

Why is the European Central Bank raising rates against the global easing trend—and what is the logic behind it?

Why has energy inflation surged so sharply? With the escalation of Middle Eastern conflict, international oil prices have soared above USD 100 per barrel—the highest since May 2026. Europe relies heavily on imported energy; thus, higher oil prices directly push up electricity costs, transportation expenses, and chemical feedstock prices—all ultimately feeding into headline inflation. Core inflation—excluding energy and food—remains relatively moderate at 2.4% in August, while food inflation stands at just 1.2%. The crux of the problem lies squarely in this single pillar: energy. III. Textbook Logic Says 'Cut Rates'—So Why Is It Raising Them? Second rate hike of the year: Deposit facility rate raised to 2.50%, main refinancing rate to 2.65%, marginal lending facility rate to 2.90%. According to textbook macroeconomic logic, weak growth calls for rate cuts to stimulate demand—yet the ECB’s move appears decidedly 'anomalous.' But the ECB’s mandate is unequivocal: price stability comes first—growth is secondary. Its statutory inflation target is 2%. Current inflation stands at 3.3%, exceeding the target by over one percentage point—and forecasts indicate it will remain above target for at least three years. There is simply no room for rate cuts. That is why President Christine Lagarde repeatedly emphasized 'inflation stickiness' in her post-meeting press conference: ongoing geopolitical conflict continues pushing energy prices higher, sustaining persistent upside pressure on prices. She also stressed that the ECB does not pre-commit to any interest-rate path—each decision will be assessed on a meeting-by-meeting basis. Incidentally, this rate hike is widely seen as increasing the likelihood of rate hikes by other major central banks—including the Fed. Global monetary policy is being pulled off the 'synchronized easing' track—solely due to this one variable: energy. IV. Can 0.9% Growth Withstand a Rate Hike? ECB upgrades growth forecast: 0.9% for 2026, 1.4% for 2027; unemployment at 6.4% provides confidence There are, of course, trade-offs. Higher rates raise financing costs—potentially dampening investment and consumption. The ECB’s own projections estimate euro-area GDP growth of 0.9% in 2026, 1.4% in 2027, and 1.5% in 2028. Yet there’s a counterintuitive twist: the ECB has upgraded its growth forecasts for both 2026 and 2027—citing stronger-than-expected economic resilience. The economy weathered the energy shock in Q2: manufacturing held up thanks to defense and infrastructure spending; consumer confidence bottomed out and rebounded; and services gradually recovered. The labor market remained robust too: unemployment held steady at 6.4% in July—a historically low level. Stable employment underpins household consumption—this is precisely the ECB’s confidence to proceed with tightening. Of course, risks are clearly enumerated: upside risks to inflation, downside risks to growth. How long this delicate balancing act can last depends not on interest rates themselves—but on oil prices. V. What Does This Mean for Us? Three Transmission Channels Ultimately, the bill for rate hikes lands on consumers: energy-price increases transmit through chemicals, transport, and manufacturing—feeding into global prices—and finally onto ordinary people’s shopping lists. The first channel is exports. The euro area is a key export market for China. Higher European interest rates and weakening domestic demand will pressure Chinese export orders and pricing to Europe. Conversely, if European manufacturers face mounting energy-cost pressures, some production capacity may relocate overseas—creating new industrial opportunities for China.

ECB Policymaker: Insufficient Data for April Rate Hike Amid Energy Inflation Concerns

Apr 15, 2026

Estonian ECB policymaker Madis Muller indicated that April rate hike decisions lack sufficient data due to energy-driven inflation, deferring clarity to the June meeting.

reuters

2026-04-15

ECB Policymaker: Insufficient Data for April Rate Hike Amid Energy Inflation Concerns

2026-04-16

IMF Expects ECB to Raise Rates by Half Percentage Point in 2026

2026-04-30

ECB Holds Rates With War’s Hit to Economy Still Unfolding

2026-04-30

ECB Policymakers See First of Several Rate Hikes in June, Sources Say

2026-05-04

ECB May Need to Hike Rates in June, Nagel Says