The Swiss National Bank unexpectedly increased interest rates for the first time since 2007, shifting away from a battle to tame a stronger currency to focus on inflation that threatens to get out of hand.
It raised its policy rate by 50 basis points to -0.25%, a dramatic move that sent the franc surging more than 2% against the euro, bringing parity between the two currencies into view.
The SNB decision came hours after Federal Reserve jacked up its key rate by 75 basis points. As Swiss policy makers led by President Thomas Jordan joined the global bandwagon of monetary tightening, they lifted their inflation forecasts and said more rate increases may be needed.
The franc’s appreciation put it on course for its biggest rally since January 2015, when the SNB removed its cap on the currency. As with Thursday’s surprise, that was also a shock decision.
The SNB has long battled against the strength of the haven franc, but the latest actions mark a major pivot. While it will remain “active” in the currency market, the central bank didn’t repeat its long standing description of the franc as “highly valued.”
The SNB also provided a two-way option for interventions. Not only is it ready to step in against excessive appreciation, it also threatened to sell the franc if it weakens. The SNB can act in “both directions,” Jordan said.
The probability of the pair trading below parity in a month’s time now stands at 19%, up from 7% at Wednesday’s close. It last touched parity in March.
A lot of macro investors will now be eyeing Swiss franc longs in a world where the SNB is hiking rates and global recession risks are intensifying.
That’s a headache for the ECB, which was already forced to hold an emergency meeting Wednesday because of a jump in yields in some euro-area countries.
