Democrat win gives markets a reason to rethink path of interest rates

The Democrats’ resounding victory in the U.S. midterms has the potential to curb interest rate hikes globally next year, according to market watchers — but the uncertain path of oil prices, U.S. economic growth and fiscal policies will be key.

Central banks around the world are back in monetary tightening mode, with the Federal Reserve, Bank of England, European Central Bank and Bank of Japan all raising rates in recent months.

The shift has in part stemmed from the U.S. and Israel’s war with Iran driving up prices in oil and gas markets. The war has also exacerbated a squeeze in global refining capacity which has sent the cost of products like diesel, gasoline and jet fuel soaring.

Traders largely expected big Democratic gains this week after polls pointed in their favor, but there was still uncertainty leading up to the vote about whether the party would capture both chambers of Congress, increasing the ability for lawmakers to challenge President Donald Trump‘s policymaking.

Crude oil prices tumbled following the clear-cut Democratic victory in both the House and Senate, with international benchmark ICE Brent crude falling 8.7% on Wednesday, closing below $100 a barrel for the first time since September.

That was largely attributed to raised expectations that the result may mean Trump is more inclined to strike a deal to end the war in Iran, helping restore Gulf refinery capacity and improve export conditions. Vice President JD Vance‘s lengthy statement blaming Republican losses on the Iran war boosted that view.

Dan Coatsworth, head of markets at AJ Bell, said there had been “an admission from the Republican camp that the Iran war cost them a clean sweep in the election, which the market has taken to indicate that a swift resolution to the Middle East conflict could help them save face.”

“Trump might relish the opportunity to take all the credit if an end to the war leads to a big drop in energy costs.”

If the election result “pushes for a resolution of the conflict in the Middle East, that might bring oil down, and that’s been an issue for the Fed and inflation, and part of the reason why rates are higher,” said Andrew Slimmon, senior portfolio manager and head of the Applied Equity Advisors at Morgan Stanley.

Historic data shows a tight correlation between oil prices and global rates, Ralph Axel, rates strategist at Bank of America, said in a research note published Thursday. Higher oil prices over the next three to six months would likely mean “significantly higher interest rates” in the U.S., but especially so in the U.K. and Germany, he said.

“If oil prices rise, we think rates will too, especially at the front end where long-end term premium is less of a factor and monetary policy expectations play a larger role,” he added.