Despite the increased inflationary pressure and the development of the situation around Ukraine, interest rate traders will still count on tightening the monetary policy of the ECB and the Fed.
Traders expect the Fed to raise rates six times by 0.25% this year, while the Bank of England is likely to increase rates five times. As for the ECB, traders predict one rate hike. In general, traders' forecasts have not changed despite Russia's invasion of Ukraine, as they believe that the escalation of the military conflict will create obstacles to the supply of energy and raw materials, which will eventually increase their cost.
Economists note that the next month will be very important for monetary policy. Money markets see an 82.8% probability of a 0.25% Fed rate hike at the March meeting, and also expect a similar move from the Bank of England. Meanwhile, the ECB is likely to leave rates unchanged, but will clarify its policy outlook and publish new economic forecasts.
"The military conflict is likely to force investors to weaken expectations of policy tightening by the Fed and other Central banks in the near future. The UK and US rate markets are likely to continue to adjust expectations more in favor of smaller 0.25 point hikes being delivered at their next meetings in March rather than 0.50 point hikes to reflect the heightened uncertainty," MUFG economists said.