Higher Oil Prices Could Lift Interest Rates Sharply, BofA Warns

what happened

According to a research note from BofA Securities, reported by Market Talk, a further rise in oil and oil products over the next three to six months could push interest rates markedly higher. The two-year US nominal interest rate swap, which reflects expectations for rates over the next two years, has climbed 113 basis points so far this year. On days when oil rose, it gained 196 basis points, and on other days it fell 83.

The bank notes that UK and German rate moves have been even more dramatic. BofA says the Fed would have more room to raise rates if energy inflation picked up, given the resilience of US growth and consumption and relatively tight labor markets.

why it matters

The oil-rates link matters for markets: if energy inflation strengthens, expectations for tighter monetary policy could reprice quickly, pressuring bonds and currencies sensitive to rates. This is the bank's assessment, not a forecast.

market impact

US bonds and rates: higher oil strengthens expectations of higher Fed rates

• ▲US two-year swap rates pressure up — higher oil fuels inflation expectations and Fed rate expectations

tags

instruments