(Bloomberg) -- 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.
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Traders pushed back the timing of a first 25-basis-point rate increase by the Federal Reserve to September from June, while briefly pricing out any more hikes unit 2023. 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 were also slashed, with only a seven basis-point increase priced in, around half of that seen earlier this week.
The shift comes as countries including the U.K. and Israel curbed travel from South Africa and some neighboring nations after a new Covid-19 variant, which carries a high number of mutations, was identified there. The European Union said it would propose to take similar measures.
"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."
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, wrong-footing traders positioned for rate increases. For months, central banks have been priming the market for an era of tighter monetary policy as the global economy emerged from the pandemic and inflation accelerated.
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The World Health Organization and scientists are studying the recently identified variant, which has been described as very different to previous versions and of serious concern. Researchers are still trying to determine whether it is more transmissible or more lethal than previous strains.
If the new strain turns out to be as potent as it seems, it "will negate the need for monetary tightening that most developed market central banks were leaning towards," said Peter Chatwell, multi-asset strategist at Mizuho International Plc. He expects central banks to push back interest-rate hikes by about six months in this instance.
Five-year government bond yields, which are most sensitive to monetary policy, led declines in the U.S. and U.K., falling as much as 18 basis points to 1.16% and 14 basis points to 0.60%, respectively.
Traders are also pushing back of bets for monetary tightening in central and eastern Europe, among the first regions to react to a spike in prices with interest-rate increases this year. Forward-rate agreements over the next 12 months in Hungary, Poland and the Czech Republic tumbled more than 20 basis points.
(Updates with context.)
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