As fears of an all-out invasion of Ukraine by Russia heighten, spikes in energy prices and knock-on economic effects could spell trouble for central banks.
Euro zone money markets were pricing in a 10 basis point hike by June 2022 following the central bank's Feb. 3 meeting, with 50 basis points' worth of hikes expected by the end of the year. However, money markets on Tuesday showed investors' expectations for hikes had diminished slightly. They indicated around a 95% chance of a 10 basis point hike in July, with 40 basis points priced in by year-end.
An invasion of Ukraine by Russia could ultimately deepen this confusion, he said, with higher energy prices continuing to push the expected inflation peak further out. Given this dichotomy, Matteo Cominetta, senior economist at Barings Investment Institute, warned that investors should position for even higher uncertainty and prepare for the possibility of policy mistakes.
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