Market observers suggest that the Democratic Party's decisive victory in the mid-term elections in the United States could slow down the pace of global interest rate hikes next year, but uncertainties regarding oil prices, U.S. economic growth, and fiscal policy will still be key factors.

As the Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan have all raised interest rates in recent months, central banks around the world have returned to a mode of monetary tightening.

This shift is due in part to the war between the United States and Israel and Iran, which has pushed up oil and gas prices. The war has also exacerbated global refining capacity tensions, causing costs for products such as diesel, gasoline, and aviation fuel to soar.

Traders generally expected the Democrats to make significant progress before this week's voting, as polls showed them in the lead. However, ahead of the election, the market remains uncertain whether the party will be able to take control of both houses of Congress, thereby enhancing legislators' ability to challenge President Donald Trump's policy-making.

After the Democrats clearly won both the House of Representatives and the Senate, crude oil prices tumbled significantly. The international benchmark ICE Brent crude fell by 8.7% on Wednesday, closing below $100 per barrel for the first time since September.

The market generally attributes this to rising expectations: the election results may indicate that Trump is more inclined to reach an agreement to end the Iran war, thereby helping to restore refining capacity in the Gulf region and improve export conditions. Vice President JD Vance issued a lengthy statement, blaming the Republican Party's defeat on the Iran war, which also reinforces this view.

AJ Bell Market Director Dan Coatsworth stated: 'The Republican camp acknowledges that the Iran war prevented them from achieving a decisive victory in the elections. Based on this, the market believes that if the Middle East conflict is resolved quickly, it might help them save face.'

"If ending the war would lead to a significant reduction in energy costs, Trump might be willing to take all the credit for himself."

Andrew Slemon, a senior portfolio manager and head of Applied Equity Advisors under Morgan Stanley, stated that if the election results "lead to a resolution of the Middle East conflict, it could lower oil prices, which has always been a problem for the Federal Reserve and inflation, and is also one of the reasons for rising interest rates."

Ralph Axel, an interest rate strategist at Bank of America, stated in a research report released on Thursday that historical data shows a close correlation between oil prices and global interest rates. If oil prices rise over the next three to six months, U.S. interest rates are likely to "rise significantly," especially in the UK and Germany.

He added, "If oil prices rise, we believe that interest rates will also increase accordingly, especially at the shorter end of the yield curve, as the impact of the premium on longer-term maturities is smaller, while the role of monetary policy expectations is greater."

The Republican Party has no way back

However, the rebound in crude oil prices on Thursday and the volatile trend on Friday also indicate that this nearly nine-month-long conflict is far from having a definite resolution.

Dan Coatsworth of AJ Bell pointed out: 'For now, oil prices have begun to rise again, and interest rate expectations have not changed fundamentally compared to before the elections.'

The money market showed on Thursday that, compared to a week ago, interest rate expectations in both the United States and Europe have undergone moderate changes, with traders slightly increasing their pricing of the likelihood of monetary easing within one year.

According to the analysis of CNBC on the data of LSEG, within a two-year time frame, the changes in the eurozone are more pronounced than those in the United States: this week, the European Central Bank lowered interest rates by 8.7 basis points, while the Federal Reserve only lowered them by 4.6 basis points.

Laurel Lapp, the director of the United States and North America projects at think tank Chatham House, stated: "The Republicans actually don't have many options at this point. We know that the Democrats will try to push for votes in the House of Representatives and the Senate to constrain the Republicans and limit the government's actions regarding the war in Iran. However, whether this will truly be able to constrain the government is another matter."

Clayton Allen, from Eurasia Group, stated regarding CNBC's Squawk Box Asia, that although the Iran war is not popular domestically, it would also be unpopular if it does not lead to any substantial results in the Middle East region. He predicts that the situation will escalate within a few weeks.

Bank of England Governor Andrew Bailey stated that the pressure on energy prices stems from multiple factors, including disruptions in the Strait of Hormuz, a shortage of refining capacity, and low natural gas inventories in Europe. The Bank of England raised interest rates by 25 basis points on Thursday.

He said to Steve Sedgwick of CNBC, "The peace process in the Middle East will not change all these factors."

"Let's wait and see, because in the past 48 hours we have indeed seen a decline in energy prices, but this is a very volatile situation, just as we have seen over the past seven, eight, or nine months."

KBRA Ken Egan, the head of European sovereign credit, stated that interest rate prospects mainly depend on whether the economies have sufficient internal momentum to make existing inflationary pressures more persistent.

He stated via email that Europe is "entering winter with months of high energy prices, and the full impact is still being transmitted to the broader economy."

What the central bank is concerned about is whether these pressures will begin to drive up wages and prices more broadly, or whether weak demand will limit such a transmission effect.

Growth Prospects

For the Federal Reserve, a key question is whether a blue sweep "could make U.S. fiscal policy more prudent and thereby reduce inflation," said Jane Foley, head of foreign exchange strategy at Rabobank, in an email.

However, it is still too early to judge the fiscal prospects, especially since many Democrats were elected in order to alleviate the pressure of rising living costs... Therefore, it is currently difficult to draw a clear conclusion about how interest rates will change next year.

J.P. Morgan James Sullivan, head of Asia-Pacific stock research at CNBC, stated to Squawk Box Asia that the level of fiscal stimulus in the United States is very high, and whether this situation is about to change is the current "million-dollar question".

He said, "The high level of inflation you see now is the result of a combination of various factors, ranging from the war in Iran to tariffs, to the obvious tensions in certain sectors of the energy industry."

But it is equally important to recognize that the U.S. government has been operating at a very high level of spending, and this is during a period of economic expansion with low unemployment rates, which has specific macroeconomic implications. If this situation changes, it would be possible to ease the pressure on interest rate environments in a way that would provide the Federal Reserve with greater flexibility for the future.

Baird Strategas Daniel Clifton, the head of policy research, stated that the construction of data centers in the United States is another important factor that requires attention.

"In 2025, we face significant fiscal headwinds, but that's not a big deal, as last year's AI construction led to a tremendous boom in capital expenditures. This year, it's being driven to a large extent by stimulus," he said to CNBC's Squawk Box Europe."

"If there is an environment where fiscal policy becomes tighter, the Federal Reserve raises interest rates, and at the same time AI capital expenditure and construction slow down, it is very likely that you will make a policy mistake at some point in mid-2027."

This situation occurred during the period of technological prosperity in 2000 with Y2K. The Federal Reserve was raising interest rates, and we were also facing higher oil prices. In the end, they raised them too much, which ultimately led to a recession. Our prediction was not that the United States would fall into a recession. Instead, our forecast was that the U.S. economy would experience a mid-cycle slowdown in 2027.