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Investors further scaled back bets on Monday for interest rate hikes from major central banks this year as the West ramped up sanctions against Russia for invading Ukraine, unleashing fresh uncertainty about the world economic outlook.

Aggressive rate-hike bets priced in by markets from the likes of the U.S. Federal Reserve, Bank of England and European Central Bank had already come off in the past week.

But they eased further on Monday, with money markets increasingly confident that the ECB will move later rather than sooner since tougher Russia sanctions which include blocking some banks from the SWIFT global payments system and an oil price surge will hurt the euro zone economy.

Markets now fully price in a first, 10 basis point rate hike from the ECB at its September meeting, having positioned for a June move following the ECB’s hawkish pivot earlier this month.

They anticipate 30 basis points worth of tightening in total by year-end, or the equivalent of three, 10 bps hikes. That’s down from 35 bps late last week and as much as 50 bps just a couple of weeks ago.

“It is logical for curves to shave off the likelihood of rate hikes in Europe and the U.S,” said ING senior rates strategist Antoine Bouvet. “It is too early to assess the economic impact of the current crisis but the impact on growth will be negative, we just don’t know by how much.”

Shares in European banks most exposed to Russia fell sharply on Monday while the wider euro zone banking index slid 6.7 per cent to three-month lows. Banking stocks had benefited in recent weeks from rate-hike expectations.

Trade in U.S. futures suggested the Fed was on track to begin its rates lift on in March with a 25 bps rate hike. But the probability of a more aggressive 50 basis-point rate was more like 10 per cent, versus over 20 per cent last week, according to CME data.

A Bank of Canada meeting on Wednesday could prove a gauge of how central banks in the West are assessing the potential impact of Russia’s attack on Ukraine on their growth and inflation outlook.

Canada’s central bank is widely expected to lift rates by 25 basis point in its first hike since October 2018, with just over six rate moves in total priced in by year-end.

The Bank of England is also expected to lift rates by 25 bps in March, although bets on a more aggressive 50 bps hike have come off the table.

Major central banks have a tricky path to navigate since high inflation calls for tighter monetary policies while oil prices above $100 could hurt consumption and economic growth going forward.

ECB chief economist Philip Lane has told fellow policy-makers that the Ukraine conflict may reduce the euro zone’s economic output by 0.3 per cent-0.4 per cent this year, four people close to the matter told Reuters on Friday.

“It becomes very tricky for them to navigate, especially the ECB, whereas for the Fed this will be more an inflation issue than a growth issue, so they will continue to tighten – maybe not 50 bps but 25 bps – they don’t want to be the source of theatrics in this environment,” said Salman Ahmad, global head of macro at Fidelity International.

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