The central bank has raised interest rates again.
(Photo: imago images/Andreas Haas)
Zurich The Swiss National Bank (SNB) is raising interest rates for the third time in a row due to ongoing inflationary pressure. The SNB key interest rate will be raised by 0.5 percentage points to 1.0 percent, as the central bank announced on Thursday. At the same time, the central bank signaled that further rate hikes might be necessary to ensure price stability in the medium term. In order to ensure appropriate monetary conditions, the SNB also intends to intervene in the foreign exchange market if necessary.
Central bank chief Thomas Jordan said: “Inflation has fallen somewhat since August.” The inflation rate in Switzerland is currently at three percent. “This development is encouraging; However, it is too early to give the all-clear,” Jordan clarified. Inflation is still well above the level that the SNB defines as price stability. The Federal Reserve Bank has set itself a target corridor of zero to two percent.
The interest rate hike announced on Thursday is not quite as strong as in September, when the SNB raised interest rates by 0.75 percentage points. Nevertheless, some economists had expected interest rates to rise by just 0.25 percentage points in view of falling inflation rates.
Jordan justified the latest rate hike with the risk of so-called second-round effects. Economists understand this to mean, for example, higher wage demands as a reaction to higher living costs. This is the first step in a wage-price spiral. Jordan said: “The renewed tightening of our monetary policy is necessary to ensure that inflation returns to price stability over the medium term.”
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Economist: SNB at end of rate hike cycle
Jordan also referred to the inflationary pressure from abroad. In the euro area, the rate of inflation was recently over ten percent. This requires stronger monetary policy reactions from foreign central banks, said the SNB boss. He wants to prevent Switzerland from importing higher inflation rates by raising interest rates early and by intervening in the foreign exchange market to strengthen the franc.
From the point of view of Jörg Angelé, economist at asset manager Bantleon, the SNB has largely completed the cycle of hikes with the latest hike. “The cooling economic trend will contain the risk of inflation, as will the strong exchange rate of the Swiss franc.”
An increase is still possible: “The high inflation rates in the first few months of next year could take the monetary authorities as an opportunity to take a final interest rate step to 1.25 percent in March.” Whether this happens depends on the global economy and developments of energy prices, according to Angelé.
For the time being, the SNB is assuming that inflation will be higher. As in September, she is anticipating inflation of 2.4 percent in the coming year. In 2024, a drop of 1.8 percent into the target range is expected. In the current year, consumer prices are likely to rise by 2.9 percent.
The central bank expects a significant slowdown in growth in Switzerland for the coming year. The gross domestic product (GDP) is likely to increase by around 0.5 percent after a forecast of around two percent in 2022. Weaker demand from abroad and high energy prices would have a slowing effect on the economy, it was said.
More: Interest rates, outlook, inflation, balance sheet reduction – these are the points that matter at today’s ECB meeting.