Traders now see an increase in ECB interest rates by 1%

Traders are raising bets that the European Central Bank will resort to more aggressive measures to tame inflation as the euro zone faces record energy prices following Russia’s war in Ukraine.

In particular, as reported by Bloomberg, based on swaps linked to the dates of ECB decisions, the market now expects the Bank to raise interest rates by one percentage point by the October meeting, which means that the deposit rate will reach to 1%.

It is the first time that traders are betting on such a sizeable rate hike for the ECB.

However, fears of inflationary pressures exerted by the cost of energy are not the only concerns in the eurozone. Traders are also increasing bets on a rate hike for the Bank of England, now seeing a doubling to 3.5% (up 175 basis points) by the end of the year. Just 10 days ago the market was expecting an increase of less than 125 basis points by December.

The ECB broke with its tradition of providing forward guidance on interest rates when it raised borrowing costs by half a point (50 basis points) last month, saying it would now take a “meeting-by-meeting approach”.

However, although traders expect aggressive tightening in the near term for the ECB’s monetary policy, bets point to the Bank then slowing the pace of its hikes until 2023. Specifically, the market sees ECB interest rates reaching 2% only in September next year.

This is because at a time when the ECB is faced with the strong increase in inflation, it also has to take into account the deterioration of the economic outlook in the eurozone.

Economic activity in the 19-nation euro zone has weakened as inflation in energy and food shrinks overall demand, with more and more sectors succumbing to the negative picture that has taken shape.