Markets Price ECB, Fed and BOJ Rate Hikes Within Eight Days

Market-implied probabilities show investors expect interest-rate increases from the European Central Bank, the Federal Reserve and the Bank of Japan within eight days. The ECB meets Thursday in Berlin, the Fed meets later in the week and the BOJ meets on Sept. 18.

Traders assign about a 61% chance that the Fed will raise its target range to 3.75%–4.00% from the current 3.50%–3.75%. The probability of the Fed holding is about 38.8% and futures show no chance of a cut at that meeting. The U.S. government will release the August consumer price index on Sept. 11, five days before the Fed decision; a hotter or cooler print could influence the committee’s vote.

Market contracts put roughly a 97% probability on a BOJ increase, pricing a 25 basis point rise from 1.00% to 1.25% on Sept. 18. Board member Kazuyuki Masu linked higher fuel and chemical costs from the Iran conflict to broader goods inflation and noted shipping and fertilizer costs are pushing up food prices. He warned that “if inflation accelerates here, there is a risk that the Bank might inevitably need to implement a rapid policy interest rate hike,” and added concerns that the price rises “may not be temporary shocks but rather represent more enduring trends that risk pushing up overall prices.” The BOJ estimates the neutral rate lies between about 1.1% and 2.5%.

The ECB is widely expected to lift its deposit rate by 25 basis points to 2.50% from 2.25%. Economists polled ahead of the meeting almost unanimously forecast a quarter-point increase. The ECB last raised rates in June. Euro-area headline inflation rose above 3% in the latest month, the highest in nearly three years, and price pressures have remained elevated.

All three central banks are weighing similar upward pressure from higher energy and commodity costs linked to the Iran conflict. Those costs have pushed up fuel, chemical and shipping prices, and are filtering into goods and food inflation.

In the United States, headline CPI eased to 3.4% in July from 3.5% in June. Employers added 162,000 jobs in August, above consensus estimates of about 53,000, and the unemployment rate held at 4.1%. The jobs data and the upcoming August CPI report are key inputs for Federal Reserve policymakers ahead of their decision.

If the ECB delivers the expected quarter-point increase, its deposit rate would be the highest among the Group of Seven central banks. The coming decisions by the three banks will provide direct evidence of how policymakers respond to the recent rise in energy and supply costs.