The Return of the Price of Money
For several months, markets had built a relatively comfortable scenario: inflation was expected to gradually return toward central bank targets, allowing interest rates to decline and creating a more supportive environment for risk assets. That scenario has now undergone a significant adjustment.
The European Central Bank has just raised all three key interest rates by 25 basis points, bringing the deposit rate to 2.50%. More importantly, its message has become clearly more restrictive. Inflation is expected to remain above the 2% target for an extended period, with a forecast of 3.0% for 2026 and 2.5% for 2027. Markets are now anticipating another rate increase before the end of the year, potentially as early as December.
In the United States, the debate has followed a similar trajectory. After several weeks during which a Federal Reserve rate hike appeared far from certain, the latest data have sharply changed expectations. US inflation increased by 0.4% in August, reaching 3.4% year on year, while core inflation rose by 0.3% month on month. Markets are now pricing in a probability of close to 90% for a rate hike at the Fed’s next meeting.
Japan is gradually moving in the same direction. Persistent yen weakness and broader inflationary pressures are reinforcing expectations of another rate increase by the Bank of Japan, potentially taking rates to 1.25% on September 18, according to a recent Reuters poll.
What is changing for markets is therefore not simply the level of interest rates. It is the direction of the monetary regime. The price of money is rising just as investors had begun to price in an environment of monetary easing.
A New Equation for Financial Assets
For investors, this development fundamentally changes the hierarchy of risks.
The problem is not only domestic inflation. Energy has become the main transmission channel. Oil above $100 directly increases transportation and production costs, but it also creates indirect pressure on wages, services and inflation expectations. The ECB itself has indicated that the energy shock could keep inflation significantly above its target through the first half of 2027.
In this environment, central banks have an imperfect but practically unavoidable instrument: interest rates. They cannot produce more oil or resolve a geopolitical disruption, but they can prevent a temporary energy shock from becoming persistent inflation.
This is precisely what makes the current scenario more challenging for equity markets. Higher rates are not necessarily negative when economic growth remains strong. They become much more problematic when valuation multiples are elevated and the cost of capital is rising at the same time.
Companies that are highly dependent on financing, long-duration growth stocks and segments whose valuations rely primarily on cash flows far into the future become mechanically more vulnerable. By contrast, financial companies can benefit from a higher-rate environment, while businesses with strong pricing power, solid balance sheets and significant cash generation have a relative advantage.
The change is also important in bond markets. During the low-rate period, capital was abundant and relatively poorly remunerated. With policy rates and bond yields rising, cash and bonds are once again becoming credible alternatives to equities. The return required by investors is therefore increasing across asset classes.
The real risk for markets is not a single 25 basis point rate increase. It is the possibility that investors will have to permanently reassess the price of capital.
The Market Is Changing Regime
The central scenario is not necessarily one of crisis. It is rather a market that must learn to operate with a structurally higher cost of capital.
The distinction matters. A one-off rate increase can be absorbed by a resilient economy. A succession of rate increases designed to prevent an energy shock from feeding into core inflation, however, creates gradually increasing pressure on valuations, credit, investment and consumption.
This is why the next stage will be critical. If energy prices normalize quickly, central banks may view the current tightening as a temporary response to a supply shock. If, on the other hand, oil and gas prices remain elevated for several months, the probability of a longer rate cycle increases significantly. The ECB has already indicated that the persistence of the energy shock and its second-round effects will be important determinants of its next decisions.
For investors, the strategy is therefore not simply to bet on higher or lower interest rates. It is to identify companies capable of creating value in an environment where money is no longer free.
After several years dominated by the search for duration, growth and liquidity, markets could gradually return to cash generation, balance sheet quality, pricing power and capital discipline. Financials and selected cyclical companies could regain a relative advantage, while the most rate-sensitive segments will have to demonstrate that their growth still justifies their valuation multiples.
The real regime change may lie here. The market is no longer valuing only future growth. It is beginning to value the price at which that growth can be financed.
For a deeper strategic framework on how to interpret market signals and transform them into actionable decisions, you can explore my consulting approach at Rapid Clarity.