Rate hikes by year-end

• ECB: 85 bps (71% probability of rate hike at the next meeting)
• BoE: 81 bps (84% probability of rate hike at the next meeting)
• BoC: 76 bps (77% probability of no change at the next meeting)
• RBA: 75 bps (72% probability of rate hike at the next meeting)
• RBNZ: 75 bps (88% probability of no change at the next meeting)
• BoJ: 54 bps (64% probability of rate hike at the next meeting)
• SNB: 44 bps (58% probability of no change at the next meeting)
• Fed: 19 bps (94% probability of no change at the next meeting)

(You can find last week’s market pricing here)

We can see that traders no longer expect any rate cut this year as inflation worries stemming from the energy price shock triggered a hawkish repricing across the board.

The culprit is of course the US-Iran war. Everything hinges on that.

If the war ends in the next couple of weeks, we will highly likely see a dovish repricing across the board as traders would expect the central banks to look through the short-term price shock.

If the war drags on or escalates, then the markets will continue to price in rate hikes until we get to a point where growth fears will trump inflation worries.

I think the current rate hike expectations are overblown because the energy price shock will also bring a growth shock, and rate hikes would just exacerbate the problem increasing the risks of a recession. It’s also laughable to see traders pricing almost two rate hikes for the SNB and not even one for the Fed.