LONDON, March 19 (Reuters) - Investors were sticking with bets for rate hikes in Europe on Thursday, ahead of European Central Bank and Bank of England policy decisions, with rate cut hopes dashed as
Traders ramp up European rate hike bets on hawkish cen banks, oil surge
Market Reactions to Central Bank Decisions Amid Oil Price Surge
By Samuel Indyk and Yoruk Bahceli
Escalating Energy Prices Drive Rate Hike Expectations
LONDON, March 19 (Reuters) - Investors doubled down on their bets on central bank rate hikes in Europe on Thursday, betting that surging energy prices would leave central banks there with no choice but to tighten policy as the Iran war escalates.
Oil Price Spike Following Middle East Tensions
Oil prices jumped to as high as $119 a barrel on Thursday as Iran attacked energy facilities across the Middle East following Israel's strike on its South Pars gas field, in a major escalation of the war.
Central Banks Respond to Energy Crisis
The reaction from trading floors was clear with the rate-hike bets put on since the start of the war gaining momentum, with major central banks expected to be more responsive to higher energy prices than they have in the past, especially with the 2022 energy crisis fresh in memory.
Bank of England Surprises Markets
Unanimous Decision and Rate Hike Prospects
The Bank of England vindicated those expectations on Thursday, when policymakers voted unanimously to keep rates on hold and some raised the prospect of raising rates.
That was a surprise to markets, with economists polled by Reuters mostly expecting a 7-2 vote in favour of a hold decision.
Traders Adjust Rate Hike Bets
Traders now bet the BoE will raise rates twice this year and see a chance of a third hike by year-end. They had been pricing in less than a full chance of two hikes before the decision. Highlighting the turnaround in markets, they had expected a rate cut at this meeting before the war.
Market Commentary and Broader Implications
Expert Insights on Market Positioning
"It felt as though markets were positioned for a relatively brief price shock rather than an extended crisis. If we do get prices going higher and staying higher for longer, then it makes sense that the broader washout in markets would be more painful," said Schroders head of global economics David Rees.
"It's pretty clear from the communication from the Bank of England today that all options are on the table until you get the evidence," Rees added, expecting a similar tone from the European Central Bank, which releases its interest rate decision at 1315 GMT.
ECB Rate Hike Bets Surge
Traders' ECB rate-hike bets have also jumped and they now fully price in two rate hikes and more than a 50% chance of a third move by December. That's a stark turnaround from before the war, when the risk was a cut this year.
Financial Markets React to Hawkish Central Banks
Bond Yields Surge Across Regions
The escalation in the war topped by a hawkish tone from central banks added to the pain in financial markets on Thursday.
Two-year bond yields, sensitive to interest rate expectations, surged across the world and jumped over 30 basis points (bps) in the UK, setting them for their biggest daily increase since former Prime Minister Liz Truss's failed economic plan in 2022.
Across the euro zone and the United States they were about 15 bps higher.
Fed's Hawkish Turn Influences Global Markets
The U.S. Federal Reserve kickstarted a hawkish turn from central banks on Wednesday, prompting traders to all but fold on their bets on a rate cut this year.
(Reporting by Samuel Indyk and Yoruk Bahceli; editing by Dhara Ranasinghe, Alexandra Hudson and Andrew Heavens)
