The BoE and SNB follow the Fed’s rate hike yesterday with hikes of their own, with the Swiss hiking large and surprising.
Swiss National Bank Makes Surprise Rate Hike
Thursday 16th June 2022 saw the Swiss National Bank decide to raise its policy rate by 0.50% to -0.25%, the day after the US Federal Reserve made its largest rate hike in 22 years. The SNB has been unusual in maintaining a negative interest rate for a long time, meaning depositors are effectively paying to hold assets in Swiss Francs. As a relatively strong and stable currency, the SNB felt it needed such a strong negative rate, which had no parallel elsewhere. Markets were not expecting any hike today by the SNB, let alone one of 0.50%.
SNB President Jordan stated that the purpose of the hike was to make a pre-emptive attack against inflationary contagion which is beginning to affect the Swiss economy through non-Ukrainian factors. Jordan also said that the SNB is ready to intervene in the Forex market if necessary, and that without this rate hike, they would be forecasting much higher inflation. He also stated that he no longer sees the CHF as highly valued due to its recent depreciation against other currencies.
Bank of England’s Rate Hike Underwhelms
Later in the day, the Bank of England, which controls UK monetary policy, unanimously agreed to hike its official bank rate by 0.25% to 1.25%. This was the fifth consecutive month in which the Bank of England raised its rate of interest. The hike of 0.25% was widely expected, although many analysts had begun to believe, following the Fed’s higher than expected hike the previous day of 0.75%, and the Swiss National Bank’s shock hike of 0.50%, that the Bank of England may have gone as far as 0.50%, but apparently not a single committee member supported such a course of action.
The new official bank rate of 1.25% is the highest seen in 13 years, which says something about the dovish monetary policy the UK has had for a long time.
The Bank of England also released economic forecasts, which included an upwards revision of inflation expectations. The Bank now expects to see UK CPI later this year as high as 11%.
Market Impact
More than 4 hours following the Swiss rate hike, the following price changes were observed in key market barometers:
- USD/CHF -1.74%
- EUR/CHF -1.75%
- SMI Index -1.94%
This represents a sizable reaction, with the Swiss Franc getting a boost of more than 1.75% everywhere. Furthermore, the price action in all these instruments is not yet indicating a reversal, although bearish momentum has slowed.
As for the British Pound and the UK stock market, one hour after the announcement, their prices had barely changed.
What Does This Mean for Traders?
The key takeaway from today’s releases is to expect a weaker Swiss Franc. Jordan’s comment about the Franc no longer being highly valued is significant and suggests that the SNB is prepared to see a stronger Franc to help combat inflation. This could be an edge for traders, although the SNB has shown a willingness in years past to undertake some extremely devious and unscrupulous market behaviour, so extra caution in trading the CHF is always warranted.
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