Traders increase rate hike bets in EU and UK after Fed hawkish decision

Traders are increasing their bets on the magnitude of rate hikes by the European Central Bank and Bank of England as policymakers around the world step up the fight against inflation.

WAPS linked to central bank meetings show the ECB will hike its deposit rate to 3 percent by May, double the rate expected earlier in the month.

In the case of the BOE, which is expected to hike rates later Thursday, the policy rate briefly rose to 5 percent in September 2023.

The relentless rise in bets on higher borrowing costs was exacerbated by the Federal Reserve’s decision on Wednesday to raise interest rates by three-quarters of a percentage point.

According to board member Isabel Schnabel, the ECB must continue raising interest rates despite the poor outlook for the euro zone economy.

While the 19-member currency bloc may stagnate rather than slide into recession, Germany is less likely to avoid contraction, Schnabel said in an interview with German website t-online published on Thursday.

“An emerging downturn would have a dampening effect on inflation,” said Ms. Schnabel. “Of course we take this into account when orienting our monetary policy. However, the starting point for interest rates is very low, so it is clear that we must continue to raise interest rates.”

The ECB is walking what Vice President Luis de Guindos this week described as a “fine line” as officials agree on the need to fight inflation but risk worsening Europe’s already deteriorating growth prospects if they do raise interest rates too much or too quickly.

Deutsche Bank now sees a much deeper recession on the horizon after Russia cut energy supplies in retaliation for sanctions over its attack on Ukraine.

The fight against inflation, which has proved far tougher than most expected, is far from over.

“Near-term inflation is proving to be more persistent than what central banks want, and is also proving difficult to predict,” Jefferies International strategist Mohit Kumar wrote in a note. “We expect the hawkish rhetoric to continue in the coming weeks, with a clear focus on bringing inflation down.”

European bonds fell led by the short end as trading began on Thursday.

The two-year German yield jumped 14 basis points to 1.90 percent.

ECB President Christine Lagarde said earlier this week that the cost of borrowing will continue to rise in the coming months, even after officials brought forward first steps in what she called “the fastest rate change in our history”.

The ECB has already raised the deposit rate by a total of 125 basis points since July. It raised the cost of borrowing by three-quarters of a percentage point to 0.75 percent earlier this month to squash inflation at a record 9.1 percent annual rate.

Traders expect the BOE to complete its seventh consecutive rate hike later today.

It is also likely to confirm plans to sell more of the £895bn in bonds purchased during the quantitative easing programme, increasing pressure on gilts.

Economists expect the UK central bank to raise interest rates by half a percentage point. The two-year gilt yield rose 10 basis points to 3.49 percent. Traders increase rate hike bets in EU and UK after Fed hawkish decision

Fry Electronics Team

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