Switzerland is also struggling with high inflation.
(Photo: IMAGO/MiS)
Zurich The Swiss National Bank (SNB) is bracing itself against rising inflation and surprisingly increased interest rates after more than seven years of monetary policy persistence. The key interest rate and the interest rate on sight deposits at the central bank will now be minus 0.25 percent from June 17, as the SNB announced on Thursday.
Since January 2015, the rates have been minus 0.75 percent. “The tighter monetary policy is intended to prevent inflation in Switzerland from spreading to goods and services,” said the monetary authorities.
The central bank also announced that it cannot be ruled out that further interest rate hikes will be necessary in the foreseeable future in order to stabilize inflation in the medium term. In order to ensure appropriate monetary conditions, the SNB is also prepared to intervene in the foreign exchange market if necessary.
The central bank also sent another signal for a tightening of monetary policy. From July 1st, more demand deposits will be affected by the penalty interest rate: the SNB lowered the exempt amount to 28 times the amount that banks have to deposit with the central bank. So far it was 30 times that.
Top jobs of the day
Find the best jobs now and
be notified by email.
Following the monetary policy decision, the Swiss franc rose sharply. The main export currency, the euro, recently cost 1.0240 francs after the common currency was still available for 1.0380 francs before the announcement.
Increasing pressure on the central bank
A large majority of the economists surveyed by Reuters in the run-up to the SNB’s quarterly monetary policy assessment had expected the central bank to wait for the European Central Bank (ECB) to raise interest rates and had forecast unchanged interest rates.
The pressure on the three-member SNB Governing Board to counter rising inflation in Switzerland and to change course after more than seven years of negative interest rates and monetary policy insistence had increased recently.
It is true that inflation is still moderate at 2.9 percent year-on-year in May compared to more than eight percent in the USA and the euro zone. However, consumer prices have risen more than they have in almost 14 years – and for several months they have been rising more strongly than the central bank, which is aiming for between zero and two percent.
>>> Also read: Largest rate hike since 1994: the US Federal Reserve raises the key interest rate by 0.75 percentage points
For the time being, the SNB is assuming that inflation will be higher. It now expects inflation of 2.8 percent for 2022 as a whole, after 2.1 percent was estimated in March. 1.9 (previously: 0.9) percent is then expected in 2023 and 1.6 (previously: 0.9) percent in 2024.
The SNB is sticking to its growth forecast and continues to expect gross domestic product (GDP) to increase by around 2.5 percent in 2022. “The favorable forecast is based, among other things, on the assumption that the global economy will continue to grow and that the war in Ukraine will not escalate further,” the central bank said. Unemployment should remain low.
According to Brian Mandt, economist at Luzerner Kantonalbank, the move was necessary. At 2.9 percent, inflation in Switzerland is still moderate by international comparison. But the risks had also increased in the country. “With the interest rate step, she also accepts that the franc will remain strong or even appreciate, especially against the euro.” This serves the Swiss monetary authorities as an additional means of reducing imported inflation.
More: Comment: The ECB must create clarity