SNB Ends NIRP With 75bps Hike; Here’s What Traders Expect From BOE, Norges And CBRT

Update: The Norges Bank hiked by 50bps to 2.25% as expected. The central bank said that the rate will most likely be raised further in November.

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As Bloomberg’s Ven Ram writes, “just a couple of years ago, anyone who was bearish on Treasuries would have been laughed out of the room. But suddenly the mood is deadly serious as the Fed marches us toward a brave new world with a benchmark interest rate approaching, ahem, 5%.”

On Wednesday, Powell stuck to the script as expected, with the result that we’re likely to see front-end Treasury yields push higher and higher in the coming months as we near the Fed’s “dotted” terminal rate of 4.6%. And while traders still digest Powell’s hawkish shock, let’s also take a look at what European central banks might be sending our way.

Swiss National Bank: the SNB raised rates by 75-basis points to 0.50% after its shock rate hike in June, in line with expectations (from a small majority, or 13, of 24 polled economists), in the process ending its period of negative interest rates. The central bank said it is willing to be active in the FX market as necessary, and said that further rate hikes can not be ruled out, although there was no CHF classification in the release. With many expecting a 100bps rate hike, the Swiss franc tumbled, pulling away from a 7-year high versus the euro, with the EURCHF jumping 1.1% to 0.9610, reversing a fall to 0.9466 before the announcement

Norges Bank: Norway’s central bank has little need to up the ante at this stage given that it was among the first globally to start raising rates. Yes, its Swedish counterpart went big earlier this week, but with a Norges Bank survey pointing to a worsening backdrop for economic growth, Norwegian policy makers may opt for more of a steady-as-she-goes approach.

Bank of England: Faced, in its own words, with the biggest policy challenge in the history of its monetary policy committee, the BOE’s response has been underwhelming and lackadaisical. I would be pleasantly surprised if the BOE were to raise rates by 75, rather than 50, basis points today, even if such a move should have come much earlier in the cycle, given where inflation stands today. The BOE’s current policy rate is well below neutral, meaning its benchmark rate has effectively been fueling those inflationary pressures.

CBRT (Turkey): The Turkish lira plunged to an all-time low against the dollar ahead of the central bank’s rate decision. The currency slipped as much as 0.2% to 18.38, weakening for a fourth day amid a risk-off mood in global markets. While most economists surveyed by Bloomberg predict the benchmark will stay at 13% on Thursday, a minority that includes Morgan Stanley, UniCredit SpA, and Citigroup Inc. expects the monetary authority to lower it again, with forecasts ranging from 50 basis points to a full percentage point. “We suspect the weakness in July’s activity data could be used to justify another 100 basis points rate cut this month,” Nicholas Farr, an economist at Capital Economics, wrote in a note. “As we’ve warned before though, as long as the central bank is taking instructions from the president, the risk of sharp and disorderly falls in the lira remains elevated,” he added.