The Swiss National Bank raised rates by 75 basis points on Thursday and returned to positive for the first time in eight years, ending a more than decade-long era of negative interest rates in Europe.
The reference rate in Switzerland is now 0.5 percent.
The SNB’s decision follows the US Federal Reserve’s third consecutive 75 basis point rate hike yesterday and comes amid fears of a looming European recession as inflation rises across the continent and an energy crisis threatens households and businesses this winter. .
SNB President Thomas Jordan said economic conditions “clearly indicate that monetary policy is likely to be tightened further”, adding that the SNB would do “everything” to meet its inflation target of between zero percent and 2 percent. .
“It is very clear that we do not rule out further rate hikes to maintain price stability,” Jordan said. The central bank rate setters plan to adopt the following policy in December.
Switzerland has so far managed to isolate itself from the worst effects of a global surge in price pressures, thanks to the strength of the franc.
Inflation nevertheless reached 3.5 percent in August, its highest level in more than 30 years, with Jordan warning SNB economists expected “broadening” beyond energy prices. The bank said it also observed domestically driven price increases, indicating that the strength of the franc cannot be trusted alone to bring inflation back to target.
Following today’s gains, SNB project prices in Switzerland are set to stabilize in the fourth quarter before falling toward their target early next year.
Despite its relatively small geographic size, lack of resources and a population of just over 8 million, Switzerland is one of the largest economies in Europe, worth $813 billion a year, according to IMF data, and is the world’s number one. second highest GDP per capita.
The SNB has long maintained that its zero-interest policy — first implemented in December 2014 — was necessary to curb the franc’s rising value, and had little to do with economic stimulus. For years, the SNB has also mounted massive interventions in the foreign exchange markets, using money created through quantitative easing, to try to control the value of the franc.
News of the SNB decision, which was in line with analyst consensus forecasts, sent the franc down slightly against the euro, dollar and pound. At mid-morning local time Thursday, a franc was worth $1.04 and £0.91 — a shadow below its all-time high — and $1.03 dollars.
Switzerland’s reputation for political and financial stability has long made the franc an attractive port currency for investors, putting its value under upward pressure in times of global uncertainty.
The SNB said negative interest rates, which Switzerland maintained longer and deeper than most other European countries, had been a useful and necessary monetary tool – in addition to market interventions – to contain the franc.
“We have always been aware that negative interest rates can have unwanted side effects and pose a challenge for many market participants. Overall, however, negative interest rates have proven their worth,” Jordan said.