The dance between central bankers and big investors is taking a new turn

Are markets challenging central banks — or is it the other way around?

There may be good reason for central banks to muddy the waters in a period of inflation uncertainty — not least to jar complacent investors from betting on cheap credit forever. But this could come with a hefty price tag.

Seismic moves in interest rate markets in recent weeks followed a mix of new signaling by major central banks that basically rendered unreliable their previous insistence on borrowing rates staying near zero for the next year or two.

So-called "forward guidance" has got murkier and it culminated last week in outright policy surprises.

Most obviously, the Bank of Canada abruptly abandoned bond buying and signaled a rise in interest rates early next year. Then, after days of an eerie "no show" on open markets, the Reserve Bank of Australia (RBA) formally ditched its yield curve target of 0.1% last week and swore it was unlikely to return.

Even though the RBA dismissed speculation about policy rates rising next year, money markets continue to price in as many as three quarter-point hikes through 2022.

A month of hawkish Bank of England speeches, meantime, stampeded money markets toward a U.K. rate rise — and may reach upward more than a full percentage point within 12 months. Such an early move had neither been warned of, nor bet on, as recently as August.

In effect, markets are now ignoring explicit guidance from at least two of the world's leading central banks.

This raised the ante for the U.S. Federal Reserve, which on Wednesday announced the end of its $120 billion monthly bond-buying program. Markets are already priced for at least two policy rate hikes next year. Goldman Sachs a week earlier abandoned forecasts for no rate rise at all in 2022 and now match the two hikes embedded in the rates curve.

"Central banks have lost — or are very close to losing — control over interest rates," said Chris Iggo, chief investment officer of core investments at AXA Investment Managers.

"Now the inflation cat is peaking out of the bag, the incumbent framework for setting rate expectations is perhaps inadequate," Iggo added. "It's almost as if central banks want the market to do their work for them."