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Central Banks poised to tighten

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Central Banks are poised to hike interest rates

The pressure on Central Banks to raise official interest rates is gaining momentum. Inflation hasn’t been this high for a decade or more and has triggered a noticeable shift in rhetoric from all Central Banks, most recently from the Bank of Canada. Last week, the Canadian central bank surprised markets with an unexpectedly hawkish statement. They announced the end of their bond purchase programme and brought forward the timing of their first interest rate hike to mid-2022. They also raised their forecast for inflation next year to 3.4% from 2.4%. This was a clear statement that they see inflation being a concern for some time.  What impact will this have for SONIA and EURIBOR?

The Bank of England to move this week 

The Bank of Canada is not an outlier. For the first time in over a decade, central bank meetings for all G7 countries are now live. Markets have priced in an 88% probability that the MPC will raise the Base Rate from 0.10% to 0.25%. While also given a 52% probability of a full 0.25% move to 0.35% at this Thursday’s meeting. In total, three full rate hikes are baked into the forward SONIA curve over 2022, a remarkable change since the start of September when the market expected the MPC to keep the base rate at 0.10% until at least 2023.

GBP Libor & EURIBOR

ECB last to move?

Despite inflation running hotter in Europe at 3.4% (to the UK’s 3.1%). The market is pricing in a much more aggressive tightening schedule from the BOE than the ECB. An initial rate hike from the ECB is still not priced to take place until January 2023 with a second rate hike to follow in November. The last time Eurozone inflation was this high, official Eurozone interest rates were at 4.75%. While no one is expecting Euribor to return to those levels, does a negative interest rate policy make sense in the current environment either?

Timing your Interest rate hedge

Markets react instantaneously to changes in key economic variables and well in advance of official changes in policy which typically occur following set meetings. By the time, central banks make their decisions, the markets have already had time to adjust. Waiting for a confirmation from central banks quote often leads to increased costs. The combination of rising inflation, faltering growth and fully valued equity and bond markets provide the potential for increased volatility in FX and interest rate markets over 2022. The adjustments we have seen to the market’s expectation for the future path in interest rates may not be complete. Financial risks, unlike business risk, can be managed away by hedging. It’s time to ensure that the financial risks you are exposed to are acceptable. Read more about how interest rate swaps and interest rate caps can protect you against raising rates (SONIA & LIBOR). 

Monthly Report
Martin Mulligan

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Interest rate swap vs interest rate cap

Over the last decade, interest rate caps were a popular product to protect against rising rates. However, throughout 2022 the premium has risen substantially. Firms are now switching to interest rate swaps (fixed rates). Given the credit risk, the majority of swaps are conducted directly with the lender, leaving no room for price tension. VUCA’s team of ex-bankers can calculate the true cost of a swap. Contact us today or schedule a call back below to find out more

ECB BOE May 22