Markets cut bets on rate hike as West gets tough on Russia

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LONDON/NEW YORK, Feb 28 (Reuters) – Investors cut their bets further on Monday on interest rate hikes by major central banks this year as the West tightened sanctions on Russia for invading Europe. Ukraine, creating further uncertainty about the global economic outlook.

Aggressive betting on higher interest rates priced in by markets such as the US Federal Reserve, Bank of England and European Central Bank had already taken place last week.

But they eased further on Monday, with money markets growing confident that the ECB will act later than sooner as tougher sanctions on Russia, including blocking some banks from the global payments system SWIFT and a surge in oil prices, will hurt the eurozone economy.

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Rate futures have significantly reduced the odds of a 50 basis point tightening by the Fed at its meeting this month to 6.5% on Monday night, from around 23% about a week ago. . It hit 70% earlier this month after US consumer price data showed annual inflation hit a 40-year high.

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

Fed Chairman Jerome Powell will appear before Congress this week for his semiannual testimony on the Monetary Policy Report in the final week before the pre-meeting blackout period.

“The short-term effects of the crisis appear to be inflationary, but the hit to growth is harder to discern and puts central bankers in a very difficult position,” Wells Fargo writes in a research note.

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

In Europe, markets fully priced in an initial 10 basis point rate hike from the ECB at its September meeting, having positioned themselves for a move in June following the ECB’s earlier hawkish pivot. this month .

They forecast a total tightening of 30 basis points by the end of the year, the equivalent of three hikes of 10 basis points. That’s down from 35 basis points at the end of last week and up to 50 basis points just a few weeks ago.

ECBratehikes

“It makes sense that curves reduce the likelihood of rate hikes in Europe and the US,” said Antoine Bouvet, senior rates strategist at ING. “It is too early to assess the economic impact of the current crisis, but the impact on growth will be negative, but we do not know by how much.”

A Bank of Canada meeting on Wednesday could show how Western central banks assess the potential impact of Russia’s attack on Ukraine on their growth and inflation outlook.

Canada’s central bank is expected to raise rates by 25 basis points in its first hike since October 2018, with just over six total rate moves expected by the end of the year .

The Bank of England is also expected to raise rates by 25 basis points in March, although bets on a more aggressive 50 basis point hike have been ruled out .

ECB Chief Economist Philip Lane told fellow policymakers that the conflict in Ukraine could reduce eurozone economic output by 0.3% to 0.4% this year, Reuters told Friday. four people familiar with the case. Read more

“It’s getting very difficult for them to navigate, especially the ECB, whereas for the Fed it will be more of an inflation issue than a growth issue, so they will continue to tighten – maybe not 50 bps but 25 bps – they don’t want to be the source of the theater in this environment,” said Salman Ahmed, global head of macro at Fidelity International.

US rates
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Additional reporting by Sujata Rao and Saikat Chatterjee; Editing by Bernadette Baum and Andrea Ricci

Our standards: The Thomson Reuters Trust Principles.

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