On Monday, euro zone money markets moved for pricing in a possibility of a 75 basis points increase in the interest rate by the European Central Bank (ECB).
A two-thirds chance was priced in for next month’s meeting after policymakers spoke in favor of a bigger hike over the weekend in order to curb inflation that has climbed to four times their usual target.
Isabel Schnabel, the board member of the ECB, was in particular focus, as she argued that there was an increasing risk of inflation expectations ‘de-anchoring’ from the 2% target of the bank.
Moreover, surveys also indicate that the public is also losing their trust in central banks because of inflation.
As for other policymakers, they stated that it would be reasonable to frontload hikes and that they should reach the neutral rate by the end of the year, or by the first quarter of the year.
The neutral rate is expected to be around 1.5%.
Rate hike expectations
The policy meeting of the ECB is scheduled for September 8th and traders have priced in the possibility of a rate hike of almost 67 basis points.
This means that the chance of an increase of 50 basis points has been fully priced in and there is a 67% possibility that the bank could go for a rate hike of 75 basis points as well.
On Friday, there had only been a 24% chance of the bank opting for a larger move. This was before a report was published that showed the policymakers wanted to talk about a bigger move.
This had pushed up the odds to 48%. Market analysts said that Schnabel was the one who had given the most prominent signal at the central bank symposium in Jackson Hole.
They said that she had talked about the possibility of inflation expectations going beyond the target and that the central bank would have to aggressively hike interest rates, which was new for the ECB.
With the rise in hike bets, the two-year German bond yields that are sensitive to interest rate expectations climbed to 1.162%.
This was a rise of almost 19 basis points in a single day and pushed up the yields to their highest level since June 17th.
The benchmark for the euro zone is the 10-year yield they also hit their highest in about two months at 1.548%, which was a rise of almost 15 basis points.
Market analysts said that the ECB appears to be determined to hike up interest rates and this would become evident in September’s meeting.
The expectations for a hike of 75 basis points have gone up significantly. Philip Lane, the chief economist of the ECB, also said on Monday that interest rates should be increased at a ‘steady rate’.
Bond yields did come down from their highs, as there was a sharp drop in energy prices in Germany. This was after the economy minister said that they could reach 85% of their storage target by October 1st.