UPDATED: Swiss franc in biggest daily jump since 2015 after rate hike

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LONDON, June 16 (Reuters) – Switzerland’s franc soared on Thursday after the Swiss National Bank took markets by surprise with a large interest rate hike, putting the currency on track for its biggest one-day rise against the euro in more than seven years.

The central bank had broadly been expected to stand pat on a -0.75% interest rate that was the lowest in any major developed country, though some banks had suggested a quarter-point was possible.

Instead, the SNB increased its policy rate to -0.25% from the -0.75% level it has deployed since 2015. 

The hike was the first increase by the SNB since September 2007 and follows Wednesday’s aggressive 75 bps rate increase from the U.S. Federal Reserve.

“It’s telling of the general environment that even the previous doves are now worried about inflation,” said Jan van Gerich, chief analyst at Nordea.

“The big picture remains that central banks are worried about being behind the curve and need to catch up.”

The currency jumped almost 1.8% against the euro to 1.0198. It was headed for the biggest daily rise since January 2015 when the SNB unhooked the franc from its euro peg, sending the currency soaring.

Against the dollar, the franc rose 1.4% .

On bond markets, yields on 10-year Swiss bonds rose 18 basis points at 1.51%  while two-year borrowing costs were up more than 22 bps .

Swiss .SSMI stocks plunged after the decision was announced, losing almost 3% and underperforming the pan-European STOXX index .STOXX which fell 2%.

A Swiss equity trader said franc strength was adding to pressure on stocks in the exporter-heavy bourse, which is now close to confirming a bear market.

Shares in Switzerland’s big banks Credit Suisse and UBS  fell 3.3% and 4.8% respectively.

Switzerland and Japan had been the only two major developed world central banks yet to raise interest rates in a tightening cycle that started last year. Many central banks are raising rates in 50 bps instalments.

But Swiss rate hike expectations were fanned by recent data showing inflation at a nearly 14-year high. The European Central Bank also signalled it will kick off rate hikes in July.

Analysts at currency broker Monex said Swiss inflation was mostly coming through the trade channel while the SNB unofficially targets a stronger inflation-adjusted franc rate to reduce imported inflation.

“Widening monetary policy differentials threatens this objective, hence warranting an earlier than expected rate hike. Today’s decision to surprise markets has had the desired effect for the SNB as the euro-franc dropped over 1.5%,” Monex wrote.

SNB Governor Thomas Jordan flagged more rate hikes ahead, noting the franc was not as highly valued as it used to be.

Traders have taken that as a cue to price even more aggressive tightening — money markets are betting on a 100 bps move at the SNB’s Sept. 22 meeting.

MARKET REACTION:

The Swiss franc soared almost 1.6% against the euro, to 1.0225 , and 1% against the dollar <0.9848 CHF=>, while Switzerland’s main stock index .SSMI dropped 2.5%, after the surprise hike in the policy rate to -0.25% from -0.75%. The two-year Swiss government bond yield  rose 14 basis points

REACTION:

JAN VON GERICH, CHIEF ANALYST, NORDEA

“It’s telling of the general environment that even the previous doves are now worried about inflation.”

“The big picture remains that central banks are worried about being behind the curve and need to catch up.”

GIUSEPPE SERSALE, STRATEGIST AT ANTHILIA IN MILAN.

“There a lot of nervousness. After the initial relief to the Fed … markets seem to have woken up that it is still a 75 basis points rate hike. If then the Swiss central bank surprisingly raises by half a point clearly investors imagine that the tightening of central banks is still very violent. There is very little to be cheerful about.”

CHRIS SCICLUNA, HEAD OF RESEARCH AT DAIWA CAPITAL MARKETS, LONDON:

“They did not repeat the description that (the Swiss franc) was highly valued, I guess the SNB is comfortable with that stronger currency right now in terms of it playing a role to push against imported price pressures.

“They signalled there are possibly further increases to come and it remains to be seen quite where neutral is for the Swiss and how far they want to push things.”

LYN GRAHAM-TAYLOR, SENIOR RATES STRATEGIST, RABOBANK, LONDON

“It’s clearly a big change in tack from their previous statement in March and clearly it was a significant surprise for economists.

“The SNB is also in a tight spot. This move fits with the narrative of central banks wanting to take action against inflation.”

(Reporting by London Markets and Finance Teams; Editing by Catherine Evans)

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