Sterling volatile, Norwegian crown surges and Swiss franc falls on rate hikes

STERLING was volatile, the Swiss franc fell, and the Norwegian crown surged on Thursday (Jun 22) after the Bank of England (BOE), the Swiss National Bank (SNB) and Norges Bank all hiked their benchmark interest rates.

The BOE’s Monetary Policy Committee (MPC) voted 7-2 to raise its main interest rate to 5 per cent from 4.5 per cent, its highest since 2008 and its largest rate increase since February.

After inflation data held at 8.7 per cent in May, defying market expectations and making it the highest of any major economy, investors were split on how big the new BOE hike would be.

Economists polled by Reuters last week were unanimous that the BOE would raise rates to 4.75 per cent, their highest since 2008, from 4.5 per cent.

Sterling initially rose to a day-high of US$1.2845 after the rate hike, but at 1200 GMT, it flattened on the day against the US dollar at US$1.2775 as investors worried about growth prospects in the UK.

Against the euro, it fell to an almost three-week low, last down 0.1 per cent on the day at 86.07 pence.

“The BOE continues to get it very wrong. Raising the cost of money when growth is at virtually zero, and inflation is being caused by factors outside of consumption control, is a recipe for disaster,” said Paul Oberschneider, CEO at Hilltop Credit Partners in London.

Alex Livingstone, Head of Trading and FX at Titan Asset Management, said that with terminal rates now being priced at over 6 per cent, investors will be wondering how surging cost of borrowing will impact the housing market and subsequent UK economic growth.

The Swiss franc fell after the Swiss National Bank (SNB) hiked its benchmark interest rate by 25 basis points to 1.75 per cent, defying some market expectations of a bigger increase.

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Despite an easing in Swiss inflation, currently the lowest among G10 economies at 2.2 per cent, SNB Chairman Thomas Jordan recently repeated his readiness to raise rates, encouraging markets to expect a 50-bps hike.

However, economists polled by Reuters had expected the SNB to hike rates by 25 bps.

“Unlike the European Central Bank and the Federal Reserve, the SNB can proceed slowly and steadily with its monetary policy tightening,” said Thomas Gitzel, chief economist at VP Bank Group in Liechtenstein.

The Swiss franc fell 0.15 per cent to 0.8942 against the US dollar, moving away from a six-week high it touched last week.

The Norwegian crown, on the other hand, surged after the Norges Bank raised its benchmark interest rate by 50 bps to a 15-year high, more than expected by a majority of economists surveyed by Reuters, and said it aimed for another hike in August.

In an attempt to curb inflation, Norges Bank raised interest rates to 3.75 per cent, sending the crown more than 1 per cent higher both against the euro and US dollar.

The Norwegian crown rose 1.15 per cent against the US dollar to 10.5270, marching towards a six-week high touched last week.

Versus the euro, it rose 1 per cent to 11.5860.

Economists polled by Reuters expected a 25-bps move, but a minority of participants in the survey predicted Norges Bank would hike by 50 bps amid higher-than-expected growth in consumer prices and a brighter outlook for many Norwegian companies.

The US dollar steadied near a one-month low against a basket of currencies, after Federal Reserve Chair Jerome Powell offered little room for surprise in remarks at his semi-annual testimony to lawmakers on Capitol Hill.

The US dollar index edged 0.1 per cent higher at 102.07, but stood not far from its recent five-week low of 102.00.

Trading was thin in Asia with Hong Kong and China closed for a holiday.

The euro rose to a more than one-month high of US$1.10030, extending Wednesday’s 0.65 per cent jump. REUTERS