Switzerland’s national bank raised interest rates by 75 basis points on Thursday and into positive territory for the first time in eight years, bringing to a close a more than decade-long era of negative rates in Europe.
The benchmark rate in Switzerland is now 0.5 per cent.
The SNB’s decision follows the third consecutive 75 basis point rate rise from the US Federal Reserve yesterday and comes amid fears of a looming European recession, as inflation surges across the continent and an energy crisis threatens households and businesses this winter.
SNB president Thomas Jordan said that economic conditions “clearly indicate that there is a likelihood monetary policy will be further tightened,” adding that the SNB would do “everything” to hit its inflation target of between zero and 2 per cent.
“We are very clear that we do not exclude further interest rate hikes to maintain price stability,” Jordan said. The central bank’s rate-setters plan to next set policy in December.
Switzerland has so far managed to insulate itself from the worst effects of a global rise in price pressures, thanks to the strength of the franc.
Inflation nevertheless hit 3.5 per cent in August, its highest level in more than 30 years, with Jordan warning that the SNB’s economists expected a “broadening” beyond energy prices. The bank said it was observing domestically driven price increases as well, indicating the power of the franc cannot solely be relied upon to return inflation to target.
Following today’s increase, the SNB projects prices in Switzerland will stabilise in the fourth quarter, before dropping towards its target early next year.
Despite its relatively small geographical size, lack of resources, and population of just over 8mn, Switzerland is one of the largest economies in Europe, worth $813bn annually, and has the second highest GDP per capita globally, according to IMF data.
The SNB has long maintained that its zero-interest rate policy — first implemented in December 2014 — was necessary to try to curb the soaring value of the franc, and had little to do with economic stimulus. For years the SNB has also mounted huge interventions in currency markets, using money created through quantitative easing, to try to control the franc’s value.
News of the SNB decision, which was in line with consensus forecasts from analysts, sent the franc slightly down against the euro, dollar and pound. By mid-morning local time on Thursday, a franc was worth €1.04 and £0.91 — a shade below all-time highs for both — and $1.03 dollars.
Switzerland’s reputation for political and financial stability has long-made the franc an attractive haven currency for investors, putting its value under upward pressure in times of global uncertainty.
The SNB said negative interest rates, which Switzerland maintained for longer and at a deeper level than most other European countries, had been a useful and necessary monetary tool — alongside market interventions — to control the franc.
“We were always aware that negative interest can have undesirable side- effects and presents challenges for many economic agents. On the whole, however, negative interest has proved it’s worth,” Jordan said.