Traders Ramp Up Bets on Larger Hikes as Energy Costs Bite

Traders are increasingly betting on larger interest rate hikes from both the European Central Bank (ECB) and the Bank of England (BOE), driven by concerns over rising energy costs. Oil has surpassed $100, and natural gas remains a pressure point for Europe and the UK, leading traders to expect more tightening to keep inflation in check. According to interest rate swaps tied to the ECB, there is now a 60% chance that a fourth hike will be implemented by December 2027.

The swaps indicate around 90 basis points of increases by December 2027, which would be the heaviest profile of this cycle. This translates to three quarter-point hikes plus the possibility of a fourth one. On the UK side, swaps suggest the BOE could deliver roughly the same total, pushing Bank rate to levels last seen in February 2025.

Short-dated bonds sold off across the region on Wednesday, with Germany's two-year yield reaching 3.08 percent, the highest since June 2024. Analysts warn that policymakers may be limited in their ability to implement a string of hikes, given their cautious approach.