European Central Bank Rate Hike Bets Surge
Traders are increasing bets on ECB and Bank of England rate hikes amid fears that rising energy prices will trigger renewed inflation.
The surge in energy prices, particularly oil and natural gas, is the primary driver for these increased rate hike expectations. Natural gas jumped as much as 30%. Oil rose above $100 a barrel after major Middle East producers curtailed production, and the Strait of Hormuz remained effectively closed. Swaps are now signaling that the ECB could deliver two full 25-basis-point rate hikes this year. Markets now fully price in a first ECB hike by June. Money markets imply roughly a 70% chance that the Bank of England could raise rates by year-end. Strategists are warning that policymakers could face a difficult balancing act. The energy shock simultaneously feeds inflation risks and threatens economic growth. Easing policy risks credibility, while tightening could weigh on growth. Estonian central bank Governor Madis Muller said that the probability of the next change in the policy rates now being more towards an increase has gone up in the last couple of weeks. However, he added that there is no reason to rush into any decision. The ECB must weigh the surge in energy prices and needs to see if the impact on inflation proves to be temporary or longer lasting.
