Surprise rate hike lifts Swiss franc, sterling tumbles before BoE -Breaking
LONDON, (Reuters) – The Swiss franc jumped against the dollar and euro on Thursday after the Swiss National Bank increased its policy interest rates for the first-time in fifteen years.
In tightening its monetary policy against rising inflation, the SNB joined other central bank members and raised its policy rate by -0.25%. This is an increase from the -0.75% it had used since 2015.
The SNB had not raised its rates since September 2007 and this was their first increase in rate.
Two-month record high for the Swiss Franc against the Euro. It was 1.8% higher as of 0905 GMT. The franc saw a 1.35% increase to 0.9807 against the U.S. Dollar.
Jane Foley from Rabobank London, who is head of FX strategy said that “The SNB’s move came as a huge shock.”
“Talk had been building that the SNB could start to move away from their deeply negative position on rates under the cover of the more hawkish ECB, but today’s 50 bps move is still a big surprise.”
The majority of analysts expected that the SNB would keep rates at 0% on Thursday, and then flag a rise for September. However, a handful banks forecasted a move to 25 bps.
This move came after a U.S. Federal Reserve rate increase of 75 basis points (bps) on Wednesday. Last week, the European Central Bank indicated that it would raise its rates for July. The Bank of England will likely raise rates today.
SNB and Bank of Japan met on Friday to discuss the tightening cycle which began late last year.
As global risk sentiment worsened, Sterling plunged ahead of the BoE meeting on Thursday. Although there are concerns about the British economy slowing, the central bank will likely raise borrowing costs for the fifth consecutive time.
Early London trading saw Sterling drop 1% at $1.2059, just a few days after a low of $1.2113 in the previous two years. The last time it was down 0.5% to $1.2113 before the BoE meeting. Swaps pricing suggests an approximately 80% chance for a 50-bps increase.
“If we could see a 50% hike in the rate of interest, and not our central case view,” said Jeremy Stretch from CIBC’s G10 FX strategy.
Traders also closely watched several ECB speakers as the central bank pledged to lower borrowing costs for euro zone periphery nations following Wednesday’s emergency meeting.
The euro dropped 0.4% against the dollar to $1.0400. This is not too far away from the one-month low reached on Wednesday.
The safe-haven U.S. Dollar rose in the face of worsening market risks. It was close to a 20 year high before the Fed raised borrowing costs Wednesday, which is the highest since 1994.
The index rose 0.3% to 105.18.