Lagarde’s Market Pushback Slammed by Aggressive Rate-Hike Bets

(Bloomberg) --

Markets aren’t buying Christine Lagarde’s efforts to push back against increasingly aggressive bets by traders that the European Central Bank will raise interest rates next year.

On Thursday, Lagarde failed to shift market pricing for 20 basis points of ECB hikes in December 2022 when she said that view isn’t supported by the ECB’s analysis. Less than 24 hours later, traders went even further, bringing forward that timing by two months. 

Markets are “calling Lagarde’s bluff,” was how Valentin Marinov, head of G10 currency research at Credit Agricole, bluntly put it.

The latest shift came as figures showed euro-area inflation jumped to 4.1% in September, higher than the 3.7% rate economists had forecast. It’s only the second time ever in the euro’s history that inflation has topped 4%.

Based on pricing earlier Friday, traders expect the ECB to raise its deposit facility rate by 20 basis points in October 2022. That would lift the rate to minus 0.3%, and mark the bank’s first increase in more than a decade. 

Anticipation of higher borrowing costs is also being felt in European bond markets. The 10-year yields on Italian and Greek debt -- often regarded as the riskiest in the region -- jumped 22 basis points and 11 basis points, respectively, to 1.29% and 1.17%. That’s pushed Italy’s benchmark borrowing costs to the highest since July last year.

The shift in markets comes amid a global inflation surge that’s seen some central banks -- including the Bank of England and the Bank of Canada -- shift tack already. Figures later Friday are expected to show consumer prices in the euro area are rising at a 3.7% pace, the fastest since 2008. 

Lagarde has acknowledged that faster inflation will stick around for longer than the ECB previously anticipated, but that it will ease through 2022. On Thursday, she stopped short of saying markets are wrong to bet on rate hikes next year, which reflected an agreement among Governing Council members that such a move could backfire, officials familiar with the matter said.

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