The difficulty in keeping up with the Federal Reserve’s interest rate hike plan was seen on Thursday as the Swiss National Bank made a surprise half-percentage point rate hike, and the U.K. central bank moved rates to the highest level in 13 years.
The Swiss National Bank took observers by surprise with a half-point increase, to -0.25%, which was its first increase in 15 years.
“What we are seeing is the opposite of policy coordination,” said analysts at Evercore ISI. “Under the old currency wars central banks tried to avoid deflation and prop up growth by preventing their currencies from appreciating against their peers. Under the new reverse currency wars central banks are trying to dampen imported inflation by preventing their currencies from depreciating in particular against the mighty dollar.”
The SNB move had success, with the Swiss franc surging against its rivals, including the closely watched franc/euro CHFEUR, +1.84% pair.
The pound skidded, and then rallied, after the Bank of England lifted rates to 1.25%. The 6-to-3 decision had a minority calling for a half-point hike, with one of the three, Michael Saunders, due to leave the bank in August. Language that the central bank “will if necessary act forcefully” was countered by the central bank noting the “succession of very large shocks” that have hit the U.K. economy and that demand might be starting to slow.
The pound GBPUSD, +0.53% fell as low as $ 1.2045 but then moved higher to $ 1.2239.
“The Bank of England face similar inflation challenges to the U.S. Federal Reserve and the [European Central Bank] but have been far more cautious around the pace of economic growth within the UK. The Bank of England in their latest meeting appear to have prioritized economic growth concerns over fears of runaway inflation,” said Edward Parks, chief investment officer at Brooks Macdonald.
The yield on the 2-year U.K. gilt TMBMKGB-02Y, 2.203% rose 22 basis points to 2.18%.
Meanwhile, the yield on the 10-year German bund TMBMKDE-10Y, 1.833% shot up 14 basis points to 1.78%, as Bloomberg News reported the European Central Bank might sell some securities, while buying debt of periphery eurozone members to stabilize the yield spreads. The ECB doesn’t want to exacerbate upward price pressure, the report said, citing people familiar with the matter. The yield on the 10-year Italian bond TMBMKIT-10Y, 3.869% fell a basis point to 3.81%.