Global Markets

Money markets increase global rate rise bets, putting additional pressure on central banks.

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As global inflationary pressures increase, money markets are rushing ahead with aggressive interest rate hikes, anticipating that policy will be strengthened much sooner and at a far quicker pace than rate-setters are signalling.

Energy prices reaching multi-year highs and persistent supply chain snarls have prompted concerns about future inflationary pressures, while Norway and New Zealand have become the first wealthy countries to hike interest rates as their economy recover from the COVID crisis.

Furthermore, hawkish trends at the Bank of England and the Federal Reserve of the United States encourage investors to anticipate that rate hikes are on the horizon elsewhere as well.

Accordingly, interest rate futures are rapidly ramping up rate-hike bets; Britain has seen some of the biggest moves with 19 basis points worth of tightening priced for the BOE by end-2021, versus the 2 bps expected a month ago.

For the Fed and the European Central Bank, end-2022 rate hikes are 100% and 90% priced respectively, compared to the around 50% and sub-40% seen a week ago. The messages are often in conflict with those from central bankers, who remain adamant that higher inflation is transitory and there is no rush to tighten policy.

They also contrast with the view that economic growth is moderating; Goldman Sachs (NYSE:GS) for instance has cut U.S. growth forecasts for 2022. Finally, they contradict signals from other market segments; forward inflation swaps, for example, predict Eurozone prices of less than 2% in ten years.

Most analysts believe market pricing is aggressive, particularly in places where authorities have downplayed inflation threats, such as the Eurozone. “What the market has learned about the Fed or BoE is that they have their guidance but when push comes to shove they go back to the mantra of rate hikes,” said Peter Schaffrik, global macro strategist at RBC Capital Markets.

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

While hawkish officials have fueled certain rate hike expectations, the shift in investor perception is notable in other cases. In Australia, markets have increased their expectations for higher interest rates next year by 40 basis points, despite the Reserve Bank’s insistence that policy will remain ultra-easy until 2024.

According to analysts, the swings in the money market may put pressure on central banks and
heighten concerns about slipping behind the curve.

Marija Veitmane, a senior tactician at State Street (NYSE: STT) Global Markets, does not anticipate aggressive rate hike cycles in any major economy, but she does understand that “given the conflicting economic cross-currents, central banks around the world are caught between the rock and the hard place right now.”

Story by : Norvisi Mawunyegah