Market bets on raising interest rates as the West gets tough on Russia

FILE PHOTO: Logo of the European Central Bank (ECB) in Frankfurt
FILE PHOTO: The logo of the European Central Bank (ECB) in Frankfurt, Germany, January 23, 2020. REUTERS / Ralph Orlowski / File Photo

February 28, 2022

By Dhara Ranasinghe and Gertrude Chavez-Dreyfuss

LONDON/NEW YORK (Reuters) – Investors further reduced their bets on Monday for rate hikes from major central banks this year, as the West increased sanctions on with Russia for invading Ukraine, creating new uncertainty about the world economic outlook.

Positive rate hike bets priced in by markets like the US Federal Reserve, the Bank of England and the European Central Bank have emerged over the past week.

But they eased further on Monday, with money markets increasingly confident that the ECB will move later rather than sooner since tougher Russian sanctions, including blocking some banks. from the global payment system SWIFT and rising oil prices will affect the euro area economy.

Interest rate futures have significantly reduced the odds of a 50 basis point Fed tightening at this month’s meeting to 6.5% late Monday, from around 23% about a week ago. It was as high as 70% at the beginning of the month after US consumer price data showed annual inflation hitting a 40-year high.

However, the Fed is expected to push with a quarter-point rate hike at its two-day meeting in March.

Fed Chairman Jerome Powell will appear before Congress this week to present his semiannual Monetary Policy Report in the final week leading up to the wait period before the meeting.

“The short-term effect of the crisis appears to be inflationary, but the impact on growth is more subtle and puts central banks in a very difficult position,” Wells Fargo wrote in a research note.

“We expect Chairman Powell to strongly suggest in his congressional testimony that the Fed will go 25 basis points, not 50 basis points, at its March 16 meeting.”

In Europe, markets have fully priced in the first, 10-bps rate hike from the ECB at its September meeting, already positioning for a move in June after the ECB’s hawkish pivot. at the beginning of this month.

They predict a total tightening of 30 basis points by year’s end, or the equivalent of a three.10 bps increase. This is down from 35 bps at the end of last week and as much as 50 bps just a few weeks ago.

“It would make sense for the curves to eliminate the possibility of rate hikes in Europe and the US,” said ING senior interest rate strategist Antoine Bouvet. “It’s too early to gauge the economic impact of the current crisis but the impact on growth will be negative, we just don’t know how much.”

A Bank of Canada meeting on Wednesday could prove a gauge of how central banks in the West are assessing the potential impact of Russia’s attack on Ukraine on growth prospects. and their inflation.

The Bank of Canada is expected to raise interest rates by 25 basis points in its first hike since October 2018, for a total of just over six rate moves by year-end.

The Bank of England is also expected to raise rates by 25 bps in March, although bets on a more aggressive 50 bps increase were unfounded.

The ECB’s chief economist Philip Lane has told policymakers that the Ukraine conflict could reduce eurozone economic output by 0.3%-0.4% this year, four people Close to the matter told Reuters on Friday.

“Navigation is going to be very difficult for them, especially the ECB, while for the Fed it will be more of an inflation issue than a growth issue, so they will continue to tighten – maybe not. not 50 bps but 25 bps – they don’t want Salman Ahmed, global head of macro at Fidelity International said.

(Additional reporting by Sujata Rao and Saikat Chatterjee; Editing by Bernadette Baum and Andrea Ricci) Market bets on raising interest rates as the West gets tough on Russia

Caroline Bleakley

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