Traders unwind rate-hike bets as new COVID fears spread

Money markets are offloading bets on central bank interest-rate hikes in a hurry, as inflation fears give way to concerns that a new coronavirus strain may spread globally and slow economic growth.

Money markets are offloading bets on central bank interest-rate hikes in a hurry, as inflation fears give way to concerns that a new coronavirus strain may spread globally and slow economic growth.

Traders have pushed back the timing of a 25-basis-point rate increase by the Federal Reserve to September from June, with only one further hike expected for the remainder of 2022. It’s a similar story in the U.K. where the Bank of England is now expected to tighten policy in February instead of next month.

Wagers that the European Central Bank will raise its deposit rate by the end of next year have also been slashed, with only a seven basis-point increase priced in, around half of that seen earlier this week. The European Union is proposing to follow the U.K. in halting air travel from southern Africa after the new COVID-19 variant was identified there.

“Over the next couple of weeks we could see this move continuing,” said Pooja Kumra, senior European rates strategist at Toronto-Dominion Bank, in an interview on Bloomberg Television. “Right now we would expect central banks to remain more sympathetic to the situation before removing any accommodation.”

Major central banks have spent months priming the market for an era of tighter monetary policy as the global economy emerged from the pandemic and inflation accelerated. Yet the prospect of widespread travel restrictions and renewed curbs to social activity mean policy makers have to think twice before starting to pull back on support, dealing a blow to traders positioned for rate increases.