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

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LONDON, Oct 12 (Businesshala) – As inflationary pressures mount around the world, money market pricing is proceeding with aggressive interest rate hikes, in most cases betting that policy will be tightened soon. and are indicating at a much faster pace than rate-setters.

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Energy prices at multi-year highs and relentless supply chain snarls have heightened fears of future inflation, while Norway and New Zealand become the first developed countries as economies recover from the COVID crisis.

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And sharp changes in the Bank of England and the US Federal Reserve have given investors confidence that a rate hike is somewhere around the corner.

Accordingly, interest rate futures are increasingly raising rate-hike bets; Britain has seen some of the biggest moves for the BOE to end 2021, with a 19 basis points reduction in price against the 2 bps expected a month ago.

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For the Fed and the European Central Bank, rate hikes at the end of 2022 are 100% and 90% respectively, compared to the roughly 50% and sub 40% seen a week earlier.

The messages are often in conflict with those from central bankers, who maintain that high inflation is fleeting and that there is no hurry to tighten policy. They are also contrary to the view that economic growth is declining; For example, Goldman Sachs has cut US growth projections for 2022.

And finally, they are at odds with signals from other market segments; For example forward inflation swaps still see euro area prices below 2% in ten years’ time.

Businesshala Graphics

Most analysts say market pricing is aggressive, especially in areas such as the euro area where policymakers have underestimated inflation risks.

Peter Shafrick, global macro strategist at RBC Capital Markets, said, “What the market has learned about the Fed or BoE is that they have their guidance, but when the push comes, they go back to the mantra of rate hikes. Huh.”

“BoE, look at Norges Bank, they are all shifting and the markets are saying the ECB can’t be weird. I think the ECB will be cautious and try to sit on their hands as much as they can.”

While policymakers have brushed off expectations of some rate hikes, in other cases the change in investor sentiment is attractive.

In Australia, markets have raised expectations of higher interest rates by 40 bps next year, even as the Reserve Bank insists it will keep policy super-easy until 2024.

Analysts say currency market movements could put pressure on central banks and increase the chances of falling behind the curve.

Marija Weitman, a senior strategist at State Street Global Markets, doesn’t expect aggressive rate hiking cycles in any major economy, but acknowledged that “given the paradoxical economic cross-currents, central banks around the world rock and are stuck between hard places now”.

UK Gilt Curve

ECB rate hike bets jump
Reporting by Saikat Chatterjee and Dhara Ranasinghe; Editing by Sujatha Rao and William McLean

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