Traders Disagree with ECB and BOE, Diverging Sharply on Rate Hike Magnitude

Traders and European central bank officials are increasingly divided over the outlook for future interest rate hikes. As soaring energy prices rekindle inflation concerns, money market expectations have turned more hawkish. Consequently, swap market pricing currently shows the European Central Bank will raise rates four more times by 25 basis points each over the next 12 months, while the Bank of England will hike five times by the same margin. These bets are far removed from the signals recently sent by central bank policymakers. The ECB has raised rates for the second time since the Iran war broke out, stressing again last week that it will not pre-commit to its next move; officials at the time already considered market bets on three more hikes too aggressive. Meanwhile, economists expect the ECB to raise rates only one or two more times. In the UK, the Bank of England has not raised rates so far this year. Deputy Governor Dave Ramsden said last week he was comfortable with the current monetary policy stance, but acknowledged upside risks. The BoE meets on Thursday, with rates expected to remain unchanged. Earlier this year, Governor Andrew Bailey pushed back against market pricing for two hikes less than half the number now priced in. Gregoire Pesques, chief investment officer for global fixed income at Amundi, said, "Central banks need to be more careful in their communication. There is fierce competition among various views and information in the market, and once a central bank starts sending ambiguous signals, the cost is very high."