AThe Swiss National Bank (SNB) is also strengthening its monetary policy. As announced Thursday morning by the SNB, it increases the reference rate and interest on sight deposits by half a percentage point, bringing it to minus 0.25%. “We want to counter the rise in inflationary pressure in this way,” SNB President Thomas Jordan said at a press conference. It is the first rate hike in Switzerland since 2007.
The franc gained strength following this decision. The euro cost 1.0240 francs after the common currency was still available for 1.0380 francs before the announcement. The prices of the Swiss stock market have collapsed. The main SMI index fell a solid 2% in an initial reaction.
With tighter monetary policy, the goal is to prevent inflation in Switzerland from spreading to goods and services, Jordan said. “It cannot be ruled out that further rate hikes will be needed in the near future to stabilize inflation in the medium-term price stability range,” she added. Furthermore, the SNB is still ready to intervene in the foreign exchange market if necessary.
For the first time in many years, the SNB president was referring not only to the foreign currency purchase tool, which has been the only tool used in recent years. Conversely, foreign exchange sales are conceivable even in the event of a strong undesirable weakening of the Swiss franc, Jordan said.
The change in the interest rate, which will apply from this Friday, is a surprise. Most economists expected that the SNB would raise interest rates only after the ECB took a corresponding step, especially since inflation in Switzerland, at 2.9 per cent (May), has so far been significantly lower. relative to the euro area. However, inflation has been rising recently. For several months it has been above the 0 to 2 percent corridor that the central bank is targeting. Jordan underlined the foresight of the SNB’s decision: “The greatest costs arise when inflation is out of control and a tight monetary policy must be pursued for an extended period of time.”
The step was facilitated by the revaluation of the Swiss franc: the SNB no longer evaluates it as “high”. Despite higher inflation abroad, the Swiss franc depreciated on a trade-weighted basis, Jordan said. “Inflation from abroad was increasingly imported into Switzerland”.
The SNB now expects inflation of 2.8 percent for 2022 as a whole, after an estimated 2.1 percent in March. Jordan sees signs that inflation is spreading to goods and services not directly affected by the war in Ukraine and the aftermath of the pandemic. “In today’s environment, price increases are passed on more quickly and accepted more easily than was the case until recently.”
A number of economists have endorsed the rate hike. “Congratulations, SNB,” wrote Thomas Gitzel, chief economist at VP Bank based in Liechtenstein. The faster key interest rates rise, the easier it is to keep inflation risk in check. It is also correct that the SNB reacts to the ECB. According to Gitzel, the SNB has thus emancipated itself. “However, this clarifies once again how far the ECB is lagging behind. The guardians of the European currency are currently traveling on a slow train and are thus putting the credibility of their monetary policy at risk ”.