Biggest Daily Jump in Swiss Franc after Rate Hike

On Thursday, Switzerland’s currency soared because of the surprise announcement by the Swiss National Bank (SNB) about hiking the interest rate by 50 basis points. This put the Swiss franc on track for its biggest rise in a single day against the euro in over seven years. It had been expected that the central bank would stick to its current interest rate of -0.75% in this meeting, which is the lowest rate in any developed country. A hike had been expected in the next meeting, but some experts had predicted a quarter-point increase in this meeting.

SNB Delivers a Surprise

Instead, the Swiss National Bank (SNB) took the markets by surprise when it upped its policy rate to -0.25%, as it had stuck to the -0.75% level since 2015. This interest rate hike is the first increase that the central bank has made since September 2007, and came after the aggressive rate hike of 75 basis points by the US Federal Reserve.

Market analysts said that this was a telling sign because even those with a dovish stance have now become concerned about the inflationary pressures. Essentially, it shows that central banks are quite concerned about falling behind and want to catch up.

There was almost a 1.8% increase in the Swiss Franc against the euro, as it reached 1.0198 which would be the biggest rise in the day after January 2015. That is when the SNB had decided to unhook the franc from the euro peg, which had driven the currency up. The franc also recorded a rise against the dollar by 1.4%.

Bond and Stock Markets React

There was an increase of 18 basis points in the yields of 10-year government bonds, as they reached 1.15%. Meanwhile, yields for 2-year government bonds had increased by as much as 22 basis points. Swiss stocks, on the other hand, plummeted after the central bank’s announcement. They lost almost 3% and also brought down the STOXX 600 index of Europe by 2%.

Market analysts said that the Swiss franc was putting pressure on stocks, since the bourse is exporter-heavy, and it was quite close to entering a bear market. There was also a decline recorded in some notable Swiss banking giants like UBS and Credit Suisse of about 3.3% and 4.8%, respectively.

Latest Expectations

While the Swiss National Bank, along with the Bank of Japan, were the only two banks of developed countries to have not hiked the interest rate, expectations for a Swiss rate hike had gone up. This was because recent data showed that inflation in Switzerland had reached a record high of 14 years. Nonetheless, an increase had still been expected in the next meeting, not this one, just like the European Central Bank (ECB) had decided to do.

According to analysts, most of the inflation in Switzerland is coming via the trade channel. The governor of the SNB, Thomas Jordan, said that there will be more rate hikes in the future because the Swiss franc is not as strong as it used to be.

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