1,000-Swiss-franc banknotes lie in a box at a Swiss bank in Zurich, April 9, 2019.
1,000-Swiss-franc banknotes lie in a box at a Swiss bank in Zurich, April 9, 2019. Reuters / Arnd Wiegmann

Switzerlad's franc and government bond yields soared on Thursday, after the Swiss National Bank took markets by surprise with a large interest rate hike.

The central bank had broadly been expected to stay pat on a -0.75% interest rate that was the lowest in any major developed country, though some banks had suggested a quarter-point was possible.

Instead, the SNB increased its policy rate to -0.25% from the -0.75% level it has deployed since 2015. .

The hike was the first increase by the SNB since September 2007 and follows Wednesday's aggressive 75 bps rate increase from the U.S. Federal Reserve.

"It's telling of the general environment that even the previous doves are now worried about inflation," said Jan van Gerich, chief analyst at Nordea.

"The big picture remains that central banks are worried about being behind the curve and need to catch up."

The currency jumped almost 1.8% against the euro to 1.0198 and 1.4 % to the dollar 0.9796 .

On bond markets, yields on two-year Swiss bonds rose 14 basis points at 0.435%.

Swiss stocks plunged after the decision was announced, losing 2.5%, underperforming the pan-European STOXX which fell by only 1.6%.

Shares in Switzerland's big banks Credit Suisse and UBS fell more than 3%

Switzerland and Japan had been the only two major developed world central banks yet to raise interest rates in a tightening cycle that started last year. Many central banks are raising rates in 50 bps installments .

But Swiss rate hike expectations were fanned by recent data showing inflation at nearly 14-year high. The European Central Bank also signalled it will kick off rate hikes in July.

Analysts at currency broker Monex said Swiss inflation was mostly coming through the trade channel while the SNB unofficially targets a stronger inflation-adjusted franc rate to reduce imported inflation.

"Widening monetary policy differentials threatens this objective, hence warranting an earlier than expected rate hike. Today's decision to surprise markets has had the desired effect for the SNB as the euro-franc dropped over 1.5%," Monex wrote.