Money markets step up bets on global rate hike, add pressure on central banks


An illustrative photo of US dollar, Swiss franc, sterling and euro banknotes taken in Warsaw on January 26, 2011. REUTERS / Kacper Pempel

LONDON, Oct. 12 (Reuters) – As inflationary pressures intensify around the world, money markets are moving forward with aggressive interest rate hikes, in most cases betting policy will be tightened much earlier and at a much faster rate than the rate setters are signaling.

Energy prices at multi-year highs and relentless supply chain grumbling raised fears of a future spike in inflation, while Norway and New Zealand became the first developed countries to hike rates as as economies recover from the COVID crisis. Read more

And hawkish moves by the Bank of England and the US Federal Reserve are leading investors to believe rate hikes are imminent elsewhere as well.

As a result, interest rate futures rapidly increase the rate hike bets; Britain has seen some of the biggest moves with 19 basis points of BOE price tightening by the end of 2021, up from 2 basis points expected a month ago.

For the Fed and the European Central Bank, rate hikes at the end of 2022 are 100% and 90% respectively, down from around 50% and less than 40% a week ago.

The messages often conflict with those of central bankers, who remain adamant that the rise in inflation is transitory and that there is no rush to tighten policy. They also contrast with the view that economic growth is moderating; Goldman Sachs, for example, lowered its US growth forecast for 2022.

And finally, they are at odds with signals from other market segments; forward inflation swaps, for example, will still see eurozone prices below 2% ten years from now.

Reuters Charts

Most analysts say market prices are aggressive, especially in regions such as the eurozone where policymakers have downplayed inflation risks read more.

“What the market has learned about the Fed or the BoE is that they have their forecasts, but when time is of the essence they revert to the rate hike mantra,” said Peter Schaffrik, macro strategist. global at RBC Capital Markets.

“Look at the BoE, the Norges Bank, they all change and the markets say the ECB can’t be the intruder. I tend to think the ECB will be cautious and try to sit down as much as it can. . “

While some rate hike expectations have been fueled by hawkish policymakers, the shift in investor perceptions is eye-catching in other cases.

In Australia, markets have raised expectations for higher interest rates next year by 40 basis points, although the Reserve Bank insists it will keep the policy very accommodative until 2024.

Analysts believe that money market moves could increase pressure on central banks and heighten fears of falling behind.

Marija Veitmane, senior strategist at State Street Global Markets, doesn’t expect aggressive rate hike cycles in any major economy, but she acknowledged that “given conflicting economic cross-currents, central banks around the world are caught between the hammer and place it now “.

british golden curve
Bets on ECB rate hike jump

Reporting by Saikat Chatterjee and Dhara Ranasinghe; Editing by Sujata Rao and William Maclean

Our Standards: Thomson Reuters Trust Principles.

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