Forecasts of rate increases in the nearest future are withdrawn, as a new COVID strain appears

Financial markets are withdrawing their bets on central banks interest-rate increases, as worries over inflation were replaced by fears over a new coronavirus strain and its potential to slow down economic growth.

Traders have rushed to postpone the timing of the first possible 0.25% rate hike by the Federal Reserve from June to September, and now only one more increase is expected for the rest of the next year. The same scenario can be seen in the U.K., as the Bank of England is now expected to start a tightening cycle not in December, but in February.

Odds of the European Central Bank raising its deposit rate by the end of 2022 were also reduced. Now, such a change is priced in only 0.07%, while it was twice higher only a few days ago. The European Union suggests following the U.K. example and stop air travel from southern Africa after the new COVID-19 strain was found there.

“During the next few weeks, we may see this tendency going on,” – noted Pooja Kumra of TD Bank. “Now we believe central banks will show more sympathy to the situation before removing any support measures.”

The central banks have been preparing the market for a period of a tighter monetary policy for month, as the global economy was recovering from the pandemic and inflation growth went up. However, the possibility of another round of travel restrictions and limits to social activity mean policy makers need to reconsider their plans of reducing support, affecting traders who were ready for rate gains.

The World Health Organization and scientists are thoroughly studying the new strain, which seems to be much different from the previous ones and can pose a significant risk. The U.K., Singapore and Israel already stopped travel from South Africa and certain neighboring countries. Hong Kong confirmed two cases of the new COVID strain.

In case the new variant of the virus appears to be as dangerous as it seems, it will “eliminate any need for monetary tightening that most central banks were moving towards,” noted Peter Chatwell of Mizuho International Plc. In his opinion, central banks will push back rate increases by about six months.