Estimating ECB Rate Expectations from OIS Meeting Contracts
Summary
This explanation describes how to infer market expectations for central bank rate changes in Europe using overnight index swap meeting contracts. Each contract spans the effective dates associated with two successive policy meetings. Its fixed rate can be compared with the prevailing overnight index fixing, such as EONIA for the euro, to estimate the expected policy move over that interval. Similar meeting-contract markets exist for several other currencies.
The answer cautions that the overnight fixing may already differ from the policy target, so that spread must be accounted for before interpreting a quoted rate as a hike or cut probability. It also notes that the floating leg compounds daily and that currency-specific conventions, including the day-count basis, matter for accurate valuation. The approach is a rough market-implied estimate, not a direct probability measure without assumptions; month-end funding effects and rate-fixing behavior can affect the interpretation.
Key ideas
- OIS meeting contracts cover the period between effective dates associated with successive central bank meetings.
- Comparing a meeting contract’s fixed rate with the current overnight fixing gives a rough indication of priced policy moves.
- The overnight index fixing may differ from the central bank target, so the existing spread matters for interpretation.
- Daily compounding and currency-specific day-count conventions affect contract valuation.
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# How to quantify how many ECB hikes are priced in? # How to quantify how many ECB hikes are priced in? My question comes in the same vein as the market estimates (roughly) how many hikes are priced in the US through looking at Fed Funds futures contracts. Is there a way to come up with a similar estimate in Europe, and if so, which contracts would one refer to? ## Answer by FinanceGuyThatCantCode (score 2) https://quant.stackexchange.com/a/33914 Here are some BBG quotes for EUR OIS meeting contracts. AUD, CAD, EUR, GBP, NZD have reasonably liquid OIS meeting contracts. A meeting contract represents a forward OIS contract starting on one central bank meeting date and terminating at the next central bank meeting date (actually effective dates of the meet dates I should say - usually the next day except for EUR where the effective date tends to be the Wednesday of the following week which is usually 6 days later than the meet date). You can probably think of the daily fixing for the appropriate OIS index (e.g. EONIA for EUR and SONIA for GBP) of each currency as being roughly constant over the life of the contract except for some end-of-month funding oddities that cause spikes in the respective indices sometimes. Then consider the fixed rate of the meeting contract relative to what the current policy rate is to get the expected number of hikes. Another technicality is that there is often some spread to where the fixing are currently happening relative to where the policy rate is targeting. As an example, for GBP, SONIA is fixing around 21.2 bps for the most part even though the policy rate is 25 bps. Right now the first GBP OIS meeting contract (GPSF1A Curncy in BBG) is trading around 21.1 bps - this implies pretty much a 0% chance of a rate change - and not a (25-21.1)/25 chance of a 25 bps cut because the fixings are already around 21.2 bps as it is. To value the swap properly, you need to use the correct conventions for each currency and bear in mind that the floating leg is compounding daily (weighted by the number of days between fixes). The compounding is probably just a rounding error, but getting the ACT/36X convention right is important.
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