Franc exchange rate rises: Switzerland advances with rate hikes

AThe Swiss National Bank (SNB) is also tightening its monetary policy. As the SNB announced on Thursday morning, it is increasing the key interest rate and the interest on sight deposits by half a percentage point to minus 0.25 percent. “We want to counteract the increased inflationary pressure in this way,” said SNB President Thomas Jordan at a press conference. It is the first rate hike in Switzerland since 2007.

The franc gained strength following this decision. The euro cost 1.0240 francs, after the common currency was still available for 1.0380 francs before the announcement. Prices on the Swiss stock market tumbled. The leading index SMI fell a good 2 percent in an initial reaction.

With the tighter monetary policy, the aim is to prevent inflation in Switzerland from spreading to goods and services, said Jordan. “It cannot be ruled out that further rate hikes will be necessary in the foreseeable future in order to stabilize inflation in the medium-term range of price stability,” he added. In addition, the National Bank is still ready to intervene in the foreign exchange market if necessary.

For the first time in many years, the SNB President was referring not only to the instrument of foreign exchange purchases, which has been the sole instrument used in recent years. On the contrary, sales of foreign exchange are also conceivable in the event of an undesirably strong weakening of the Swiss franc, said Jordan.

The interest rate change, which will apply from this Friday, comes as a surprise. Most economists had expected that the SNB would only raise interest rates after the ECB had taken a corresponding step, especially since inflation in Switzerland, at 2.9 percent (May), has so far been significantly lower than in the euro area. However, inflation has accelerated recently. For several months it has been above the corridor of 0 to 2 percent that the central bank is targeting. Jordan emphasized the far-sightedness of the SNB’s decision: “The greatest costs arise when inflation is out of control and a restrictive monetary policy has to be pursued for an extended period of time.”

The step was made easier by the reassessment of the Swiss franc exchange rate: the SNB no longer rates it as “high”. Despite higher inflation abroad, the franc has depreciated on a trade-weighted basis, Jordan said. “Inflation from abroad was increasingly imported into Switzerland.”

The SNB is now anticipating inflation of 2.8 percent for 2022 as a whole, after estimating 2.1 percent in March. Jordan sees signs that inflation is spreading to goods and services not directly affected by the war in Ukraine and the aftermath of the pandemic. “In today’s environment, price increases are passed on more quickly and accepted more easily than was the case until recently.”

A number of economists approved of the rate hike. “Congratulations, SNB,” wrote Thomas Gitzel, chief economist at Liechtenstein-based VP Bank. The faster the key interest rates go up, the easier it is to bring the risk of inflation under control. It is also correct that the SNB is reacting before the ECB. According to Gitzel, the SNB has thus emancipated itself. “However, this makes it clear once again how much the ECB is lagging behind. The European currency guardians are currently driving on in the slow train and are thus risking the credibility of their monetary policy.”

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