Traders trimmed the odds of a half-point hike by the European Central Bank later this week to under 50 per cent, with the prospect of further monetary tightening fading rapidly across the world after the collapse of Silicon Valley Bank.

Money markets priced in 34 basis points in hikes for Thursday, which implies a less than 50 per cent chance of a 50-basis-point increase. Traders now see the ECB deposit rate peaking at 3.30 per cent, some 90 basis points lower than just a week ago.

The repricing shows how swiftly monetary policy expectations can be upended as signs of systemic risks emerge. President Christine Lagarde signalled a half-point hike was highly likely at its last monetary policy meeting in February, and the market had treated it as a near certainty ever since.

“The ECB is in a tricky problem as it could be forced to rescind its ‘promised’ 50bps rate hike for this week,” said Steven Barrow, Standard Bank’s head of Group-of-10 strategy. “If it does it would show, once again, that there is no merit in central banks telegraphing future rate moves unless policy rates are stuck at zero.”

The move in money markets was followed by a historic rally in bonds, with the yield on the two-year German note down as much as 60 basis points, on track for its biggest drop on record. 

Wagers on further tightening by central banks worldwide have collapsed after the failure of Silicon Valley Bank over the weekend and the government rescue of its depositors. At one point on Monday, traders almost entirely priced out any further hikes by the Federal Reserve.

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“We are confident that, if needed, European authorities will also intervene with the same speed, and will evaluate any implications for the conduct of monetary policy and for financial stability,” Italian Finance Minister Giancarlo Giorgetti said.

For Bloomberg Economics, the events also lower the chances of the ECB committing at this week’s meeting to another big increase in borrowing costs. Some analysts say the ECB risks both misjudging how systemic the fallout of SVB is and failing to tamp down on inflation as aggressively as needed.

“The call will be tricky with a risk of a policy mistake from both ends,” said Fredrik Repton, a portfolio manager at Neuberger Berman. “In my opinion it’s probably best from a risk management position to do a 25-basis-point move.” BLOOMBERG