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Swiss National Bank ready for further rate hikes after shock

The Swiss National Bank (SNB) raised its benchmark rate for the first time in 15 years in a surprise move on Thursday and said it was ready to raise further, joining other central banks in tightening monetary policy to to combat the upsurge in inflation.

The central bank raised its key rate to -0.25% from the level of -0.75% it has deployed since 2015, sending the safe haven franc sharply higher. Almost all economists polled by Reuters expected the SNB to keep rates steady.

It was the SNB’s first increase since September 2007, and followed a 0.75% rate hike by the US Federal Reserve on Wednesday.

Read also | US Federal Reserve announces historic interest rate hike; Wall Street stocks surge

Other central banks are also raising interest rates as they try to rein in inflation driven by soaring fuel and food prices that are straining household and business budgets.

The Bank of England looks set to raise interest rates again on Thursday as it tries to battle double-digit inflation.

The European Central Bank announced last week that it would raise rates in July to control eurozone inflation, which hit 8.1% last month.

SNB President Thomas Jordan said the inflation situation, with Switzerland recording its biggest price rises in nearly 14 years in May, meant the SNB might have to act again.

“The new inflation forecasts show that further increases in the policy rate may be needed for the foreseeable future,” he told a news conference.

Thursday’s rate increase was necessary to control rising prices in Switzerland, which had spread to goods and services previously unaffected by the impact of the war in Ukraine and bottlenecks pandemic-related supply chain.

Watch | Bank of England to raise interest rates as UK inflation heads towards 10%

“In the current environment, price increases have been passed through more quickly and are also more readily accepted than was the case until recently,” Jordan said.

“There is the threat of second-round effects becoming entrenched if inflation stays above 2% for a long time.”

He said the recent depreciation meant that the Swiss franc was no longer highly valued in the foreign exchange markets, a long-standing concern for the SNB and that the SNB was ready to intervene in the markets to control excessive appreciation or a weakening of the franc.

The strength of the safe-haven franc has dampened the impact of inflation in Switzerland by reducing rising prices for fuel and food imports, but that has been less the case after its recent weakening, Jordan said.

Read also | Ukraine raises policy rate to 25% in first hike since Russian invasion

“So inflation imported from abroad has increased,” he said. “Another consequence of this depreciation coupled with significantly higher inflation abroad is that the franc is no longer highly valued.”

The SNB raised its inflation forecast for 2022 to 2.8% from 2.1% in March. He also expects inflation of 1.9% and 1.6% in 2023 and 2024, up from his previous view of a 0.9% rise in prices over the two years.

The SNB still expects the Swiss economy to grow by around 2.5% in 2022.

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Post expires at 11:01am on Sunday June 26th, 2022