Traders Boost ECB, BOE Rate-Hike Bets as Energy Prices Soar
(Bloomberg) -- Traders amped up bets on European Central Bank and Bank of England interest-rate hikes after soaring energy prices fueled fears inflation will surge.
Swaps imply two full 25-basis-point hikes by the ECB this year compared with one on Friday. A first hike is fully priced by June. Meanwhile money markets now see around a 70% chance of a BOE hike by year-end compared to bets on rate cuts last week.
“The ECB and BOE are effectively paralyzed: easing into an oil shock risks credibility, tightening risks growth,” said Evelyne Gomez-Liechti, a strategist at Mizuho International Plc. “Our bias remains that EUR rates stay under pressure, with energy risk overwhelming any near‑term disinflation narrative.”
German bonds slumped, led by short-dated notes that are among the most sensitive to changes in monetary policy. The two-year yield jumped 13 basis points to 2.44%, while its UK counterpart surged as much as 28 basis points to 4.15%. The US, which is not reliant on energy imports, saw its two-year yield rise six basis points to 3.62%.
Italian bonds bore the brunt of a rush from risky assets, widening the 10-year spread over safer German peers by seven basis points to 83 basis points.
A gauge of European inflation expectations is headed for its highest close since July 2024, rising seven basis points to 2.23%. UK equivalents are on course to close at their highest since March.
That followed fresh jumps in energy prices. Natural gas rose as much as 30% on Monday, while oil futures climbed above $100 a barrel as more major Middle East producers curbed production and key shipping route the Strait of Hormuz remained effectively closed.
(Updates throughout. An earlier version was corrected to say a first ECB hike was priced by June.)
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