SNB ends negative interest rate period

The Swiss Central Bank raised its key interest rate by 0.75 percentage points from -0.25% to +0.5%.

The Swiss National Bank (SNB) closed Thursday after nearly eight years of negative interest rates. To combat runaway global inflation, the issuer has indicated it will continue to tighten monetary policy and intervene in the foreign exchange market “when necessary.”

The Swiss Central Bank announced at a press conference that it had raised its key interest rate by 0.75 percentage points from -0.25% to +0.5%.

With this decision, the issuing agency “against inflationary pressures that have risen again and have so far hindered penetration of goods and services less affected by higher prices”.

The SNB warned in a press release that it “does not rule out the need for further rate hikes to ensure price stability in the medium term.”

Regarding the franc, the SNB has stressed that it is “ready to act proactively in the foreign exchange market if necessary to ensure an appropriate market environment”. Therefore, the SNB can buy and sell currencies to control the evolution of its own currency.

The franc fell sharply against the euro following these announcements. Although it broke below 0.95 EUR/CHF early in the morning, it rose to 0.9617 EUR/CHF at 09:47.

The SNB introduced negative interest rates for the first time in December 2014, cutting Libor’s volatility (the reference rate at the time) between -0.75% and +0.25%. A few weeks later, on 15 January 2015, after the removal of the floor rate against the euro, the latter was cut between -0.25% and -1.25%, entering fully negative territory.

With this measure, the SNB hoped to prevent an excessive appreciation of the franc. Coupled with heavy currency purchases, the key rate has since remained in negative territory.

The Federal Reserve has aggressively raised interest rates

The SNB’s key rate hike comes in the context of a global tightening of monetary policy to combat a surge in inflation. On Wednesday night, the US Federal Reserve (Fed) tightened monetary policy again and warned of the need for more tightening.

The Fed has raised the key rate by three-quarters of a percentage point and is now in the 3.00-3.25% range.

The Swiss National Bank also raised its inflation forecast for the current year and the next two years. Inflation is expected to reach 3.0% in 2022, 2.8% in the June index, 2.4% (1.9%) in 2023 and 1.7% (1.6%) in 2024. However, these rates are far from those observed in the Eurozone. America.

Meanwhile, the growth forecast for 2022 is modest at 2.0% compared to 2.5% previously. Issuers noted a significant slowdown in the global economy.

A slowing global economy, worsening gas shortages in Europe and electricity shortages in Switzerland are the biggest risks.

Inflation will be higher without rate hikes

Inflation would have been higher without the monetary policy tightening implemented by the Swiss National Bank (SNB) on Thursday, the head of the Swiss issuing agency said. The risks to the global economy are high.

“Without the rate hike announced today, inflation expectations would be significantly higher,” Jordan said, according to the text of a speech he gave at a press conference in Zurich.

With inflation at 3.5% in August, “Swiss inflation is certainly low by international comparison, but still well above the 0% to 2% range we consider price stability,” Rieder explained.

According to the latter, “Energy prices continue to rise across the board, and inflationary pressures are building in many sectors. Thus, the risk of second-order impacts is heightened.”

real negative interest rate

The franc’s strength, which has risen 7% since the last major rate hike in mid-June, has benefited the SNB. “This rally will help tighten financial conditions and ease inflationary pressures,” said Thomas Jordan.

Looking back on a long period of negative interest rates, Jordan said they were effective. “Its usefulness from a monetary policy perspective clearly outweighs its undesirable effects.”

On the economic outlook, the official noted that “global economic growth has slowed markedly in recent months” and is expected to remain weak in the coming quarters. Declining purchasing power from the rally and tighter funding terms are a hindrance.

But he warned that the energy situation could get worse. “High inflation could persist, requiring a stronger monetary policy response abroad. Finally, the Covid-19 pandemic continues to pose significant downside risks to growth,” said Jordan. rice field.

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