The Swiss National Bank (SNB) ended Thursday with almost eight years of negative interest rates. To counteract inflation, the issuer tightened its monetary policy and announced that it would continue to intervene in the foreign exchange market “if necessary”.
The Swiss central bank increased its key interest rate by 0.75 percentage points from -0.25% to +0.5%. On June 16, the issuing institution took a first step toward normalizing monetary policy with a half-point recovery.
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, the issuing institute “against the inflationary pressure that has risen again”. The SNB warned that “it cannot be ruled out that further rate hikes will be necessary”.
Vigilance towards the Franc
Regarding the franc, the Swiss central bank emphasized that it is “ready to take action in the foreign exchange market if necessary in order to ensure appropriate market conditions”. The SNB could therefore buy or sell currencies in order to control the development of the national currency.
After these announcements, the franc weakened significantly against the euro. While the currency pair fell below EUR/CHF 0.95 in the early morning, it rose to EUR/CHF 0.9617 at 09:47.
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The Swiss central bank introduced negative interest rates for the first time in December 2014 by reducing the fluctuation range of the Libor reference interest rate at the time. The latter fell completely into negative territory a few weeks later, on January 15, 2015, following the lifting of the minimum euro exchange rate.
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The strong franc as a protective shield
At the time, the SNB wanted to prevent the Swiss franc from appreciating by discouraging foreign investment in the Swiss currency, but also by stimulating consumption. When the cost of money is low, companies can borrow more easily from banks.
But with inflation at its highest level in almost 30 years, defending a strong franc is no longer a priority. It even makes it possible to contain the rise in prices, despite having a negative impact on exports. According to Credit Suisse estimates, a 10% fall in the euro-franc exchange rate reduces inflation in Switzerland by half a percentage point.
In fact, inflation has so far been contained compared to other countries. The headline consumer price index for August rose 3.5% in Switzerland over the year, versus 9.1% in the euro zone and 8.3% in the United States.
Inflation forecasts revised upwards
The Swiss National Bank (SNB), on the other hand, has revised its inflation forecasts upwards for the current year and the two following years. Inflation should reach 3.0% in 2022, up from 2.8% in June, 2.4% (1.9%) in 2023 and 1.7% (1.6%) in 2024.
These estimates are based on the assumption of a policy rate – which the SNB has just pushed into positive territory – at 0.5%.
The growth forecast for 2022, on the other hand, is moderate at 2.0%, compared to 2.5% previously. The issuing institute noted a significant slowdown in the global economy.
A slowdown in the global economy, worsening gas shortages in Europe and an electricity shortage in Switzerland are the greatest risks.
This increase in the key interest rate by the SNB comes in a global context of monetary tightening to counteract the surge in inflation. On Wednesday evening, the US Federal Reserve (Fed) tightened monetary policy again, warning that it must tighten further, which will be painful for budgets.
The Fed therefore increased its key interest rate by three-quarters of a percentage point, which is now in a range of 3.00 to 3.25%.
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