Switzerland’s central bank on Thursday raised interest rates for the first time in 15 years, as it became the latest rate-setter to shift away from ultra-loose monetary policy.
The Swiss National Bank said its benchmark rate would rise by 50 basis points from minus 0.75 per cent to minus 0.25 per cent, catching markets off guard. The Swiss franc surged following the surprise decision, gaining 1.7 per cent to trade at 1.02 to the euro, the strongest level in nearly two months.
The move came just hours after the US Federal Reserve announced it would raise rates by 75 basis points, but ahead of a likely rise in rates from the European Central Bank in July.
As a big exporter, Switzerland closely watches the exchange rate with the euro and has, in the past, waited to follow a lead from Frankfurt. But expectations that inflation will remain uncomfortably high in the coming quarters led the central bank to go first.
“The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland. It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future,” the bank said in a short statement.
Inflation hit 2.9 per cent in Switzerland in May, its highest level in about 14 years.
The central bank also removed a reference to a “highly valued” franc in its statement, indicating it is backing away from a longstanding policy of trying to curb the currency’s strength.
“If we take the SNB by its word, it now seems as if it would like currency strength, to take the sting out of imported price inflation,” said Melanie Debono of Pantheon Macroeconomics.
The SNB’s shift is the first indication its governors are taking the rising global commodity prices seriously enough to consider reining in their expansive monetary policy. The central bank has aggressively used its balance sheet to try and anchor the entire Swiss economy over the past decade.
Switzerland’s status as a haven economy has meant the SNB has had to battle to suppress serious and sustained upward pressure on the currency over the past decade and a half of international crises and low rates elsewhere in the developed world. The franc’s strength was hindering the competitiveness of the country’s exports.
The SNB said it would continue to monitor the rising value of the franc, and was still prepared to conduct controversial interventions in the foreign exchange market.
Thanks to quantitative easing, the money from which the SNB invests abroad to depress the franc, the SNB now holds assets worth more than SFr1.056tn ($1.076tn), equivalent to just over 140 per cent of Switzerland’s entire annual gross domestic product, and making the bank’s portfolio even larger than the sovereign wealth funds of many petrostates.
The bank said the overall economic outlook for Switzerland remained positive. It forecasts low unemployment and a 2.5 per cent rise in GDP this year. The war in Ukraine has had “comparatively little adverse impact”, it said, other than in creating supply bottlenecks in a limited number of markets.
The global outlook was volatile, the bank said, but it believes inflation will be curbed in the medium term by rising interest rates around the world.
