The recent sharp decline in oil prices has produced an unexpected market response: instead of easing inflation fears and pulling down interest-rate expectations, it has pushed yields on two-year US Treasury notes higher. This reversal, which gained momentum after April’s consumer price data, signals that investors are recalibrating their views. Cheaper fuel, rather than simply lowering headline inflation, is seen as a potential stimulus to consumption and corporate margins, keeping demand robust and price pressures stubborn.

At the annual economic conference in Aix-en-Provence, senior economists from Allianz and BNP Paribas argued that the Federal Reserve still has work to do despite a softening US labour market. Non-farm payrolls rose by just 57,000 in June, and the unemployment rate dipped to 4.2% on falling participation. Yet Ludovic Subran of Allianz maintained that inflation could peak above 3.7%, fuelled by AI investment, fiscal stimulus and energy dynamics, and that the Fed might need to raise rates in September. Isabelle Mateos y Lago of BNP Paribas said the case for further hikes “remains intact,” even if a July move is now less likely. That contrasts with the euro zone, where inflation fell to 2.8%—below forecasts—as oil’s retreat amplified disinflation. The ECB, which delivered the first G7 rate rise of this cycle last month, is widely expected to hold, with Subran declaring its tightening “cycle has ended.” AXA’s Gilles Moec noted that US monetary policy was already restrictive while Europe’s was not, suggesting both could simply keep rates on hold.

For emerging markets, the repricing carries direct consequences. Bank of America has outlined a scenario in which the Fed delivers three quarter-point rate increases in 2026, taking the federal funds rate to 5.0–5.25%, though its economists acknowledge that softer jobs data and more dovish Fed communication have made that path less probable. In Brazil, the oil slide has amplified questions about further cuts to the Selic rate, but BofA’s chief Brazil economist, David Beker, says the decoupling of inflation expectations from the target reinforces a cautious stance, with the bank forecasting the Selic at 14.25% by year-end.

The next factual milestone is the Federal Reserve’s July policy meeting, where updated projections and the chair’s press conference will test whether the market’s oil-fuelled inflation anxiety is justified. Simultaneously, euro-zone activity data and the evolution of energy prices as Middle East tensions ease will determine if the ECB can indeed remain on hold.