Money Markets Bet on ECB Hikes as Banking Crisis Fades From View
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(Bloomberg) — It’s been one month since the demise of Credit Suisse Group AG, and the supposedly game-changing event barely registers as a blip for Europe’s money market traders.
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They are more convinced than they were before the crisis — not less — that the European Central Bank will keep raising interest rates to tackle inflation.
That goes against the prevailing narrative at the time. The banking crisis was expected to curb credit growth, slow the economy and take the pressure off policy makers to tighten policy. Since then Goldman Sachs Group Inc. has reinstated its forecast for a terminal rate of 3.75%, after lowering it to 3.5% amid the banking tumult.
The rapid repricing shows “focus has quickly returned to the risks of stubborn inflation,” said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. He calculates the market odds of a 3.75% peak rate have more than doubled since the banking fallout and are now even higher than in February, when surprisingly strong economic data boosted policy tightening wagers.
Money market bets, according to swaps tied to policy-meeting dates, closely align with a Bloomberg survey of economists this week, which showed the ECB is expected to deliver three quarter-point interest-rate increases in May, June and July.
A Bank of America Corp. poll of fund managers showed the same median expectation. The skew favoring an even higher rate was twice as much as for a lower rate, reflecting another response that showed almost half expect euro area inflation to be higher than 3% by the end of next year.
While slowing considerably this year, inflation in the euro-area is still more than three times the ECB’s 2% target.
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