Traders bet ECB will lift policy rate above zero by year-end

Bloomberg

Traders are betting the European Central Bank (ECB) will raise rates above zero this year for the first time since 2012, after a string of hawkish comments from policy makers spurred speculation the bank is priming the market for faster-than-expected monetary tightening.
Money markets are pricing 75 basis points of interest-rate hikes by the ECB’s December decision, according to swap contracts linked to the euro short-term rate. That’s up from less than one quarter-point increase expected at the start of the year. The ECB’s deposit rate is currently at a record low of minus 0.5%.
Bonds fall, with German two-year yields — the most sensitive to changes in monetary policy — climbing 10 basis points to 0.15%, the biggest surge in six weeks on a closing basis. The euro jumped 0.6% to touch a one-week high of $1.0916.
The repricing comes after Governing Council member Pierre Wunsch said policy rates could be raised above zero before year-end, with the bank perhaps even deploying “restrictive” policy to get surging prices under control. Adding to the sense of urgency, fellow members Luis de Guindos and Martins Kazaks said this week a rate hike in July was possible, echoing calls from the ECB’s Joachim Nagel, who said interest rates may be lifted early in the third quarter.
“Everything is possible now,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG. “The reference to a July rate hike seems almost like a concerted effort by a group of hawks.”
Euro-zone inflation exceeded estimates by surging a record 7.5% in March from a year ago, as Russia’s invasion of Ukraine fanned energy costs and added to price pressures as the economy rebounded from the pandemic. That’s forcing policy makers to quickly put an end to an era of ultra-accommodative policy, which was supercharged over the past two years help foster a recovery.
President Christine Lagarde signalled last week that officials’ next meeting in June will start the clock ticking towards interest-rate hikes and investors will be listening closely for more clues when she speaks at an IMF panel with Fed Chair Jerome Powell.
Latvia’s Martins Kazaks told Bloomberg a rate increase in July is “possible,” and that there are “no reasons” to disagree with what markets are pricing for the rest of the year.