After an intense first half, financial markets seem to be entering a more measured phase. The second half of 2026 will likely depend on the interaction between inflation, central bank policy, and the resilience of global growth, in a context already tested by geopolitical turmoil.
The outlook for central banks, however, is changing again. Earlier this year, markets feared policymakers would be forced to implement more aggressive rate hikes due to the surge in oil prices following the conflict between the United States and Iran. Those fears have eased with oil returning to around $70 per barrel, reducing the short-term pressure exerted by energy markets.
So far, the inflationary impulse does not suggest a widespread second wave. Overall inflation has risen, with US inflation above 4% and UK inflation at 3%, but underlying data do not indicate the persistent acceleration seen in 2022. Although the energy sector has pushed overall indices higher, there is limited evidence that this is decisively influencing general price-setting behavior.
This is particularly important for investors. A few months ago, the risk was another cycle of monetary tightening by central banks, but now this eventuality seems less likely. Inflation remains too high to be reassuring, but the likelihood of aggressive rate hikes has decreased with the easing of the oil shock and the economy continuing to absorb recent turbulence.
Market prices reflect this change, although expectations remain volatile. In the United States, markets continue to price in a possible Federal Reserve rate hike around December, with a modest overall increase expected for 2026. The first meeting under Kevin Warsh’s leadership will therefore be closely watched, as investors seek clarity on how the new Fed chair will steer monetary policy in a context where inflation is elevated but growth has proven more resilient than expected.
In the United Kingdom, expectations have shifted even more sharply. Markets started the year anticipating rate cuts by the Bank of England, then moved to pricing in several hikes as inflation concerns intensified. Today, they price in only one further increase, and not before next March. UK inflation could rise in the short term with the implementation of the energy price cap, but the key question is whether this increase will prove temporary or become structural. For now, available data suggest inflationary pressures should ease again by year-end.
The ECB has already raised rates and another intervention is expected. Again, expectations could change if data continue to indicate that the energy shock is not creating a more persistent inflation problem. The Bank of Japan maintains a different path in monetary policy normalization, with another rate hike possible by the end of the year.
Among major central banks, the common thread is patience. Policymakers will likely continue to rely on data, looking for signals that energy-related price increases are spilling over into broader inflation. For now, the absence of a clear second-order effect gives them room to wait rather than act preemptively. It is unlikely that monetary policy will become accommodative, but the environment may prove less hostile than markets feared at the start of the year.
Indeed, a less worrying central bank environment would be favorable, especially if economic resilience persists. Growth has slowed over the past three months, but not enough to undermine the belief that the global economy can still expand at a decent pace this year. If the geopolitical shock remains contained and confidence stabilizes, growth forecasts could even present some upside risk.
The key for the second half of the year is balance. Investors should remain vigilant to the risk that inflation proves more persistent than expected, particularly if oil prices rise again or domestic price pressures broaden. However, the base case is more positive than it was at the peak of recent market tensions. If oil prices continue to normalize, inflationary pressures should ease and central banks should have less need to adopt aggressive restrictive measures. In this context, the outlook remains positive and markets may realize that the second half of the year will be characterized less by reacting to shocks and more by the need to buy time while waiting for data to provide a clearer signal.
