Russia`s invasion increases chance of policy mistake

Global markets were explosive on Tuesday. Oil prices skyrocketed to seven-year highs behind Russian President Vladimir Putin declared that Moscow would recognize the independence of two breakaway areas of eastern Ukraine and send troops into the region.

International economic sanctions began rolling in as a consequence. The U.K. initially punched targeted sanctions on five Russian banks and three wealthy individuals. At the same time, Germany suspended the Nord Stream 2 gas pipeline certification, created to transport natural gas from Russia directly to Europe. European foreign affairs ministers assembled in Brussels on Tuesday to decide the EU’s response.

The geopolitical uncertainty arrives at a difficult time for the world’s central banks. A number have already started tightening monetary policy to fight record-high inflation. Nevertheless, spikes in oil and natural gas prices will probably exacerbate the issue further.

Hikes are diminishing

The Bank of England fired the starting gun on increasing interest rates last year and has executed two hikes at its prior two meetings, while the market is pricing in a close lift-off and aggressive hiking cycle from the U.S. Federal Reserve.

The European Central Bank has dragged its counterparts in a hawkish pivot so far. Still, it is expected to begin tightening late in 2022, with eurozone inflation also running at a record high.

Eurozone money markets were pricing in a ten basis point hike by June 2022 following the central bank’s Feb. 3 conference, with 50 basis points’ worth of hikes predicted by the end of the year. Nevertheless, money markets on Tuesday revealed investors’ expectations for hikes had declined slightly. They indicated a 95% chance of a ten basis point hike in July, with 40 basis points priced in by year-end.

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