The Swiss National Bank (SNB) ended Thursday with nearly eight years of negative rates. To counteract inflation, the issuing institution tightened its monetary policy and indicated that it will continue to intervene “if necessary” in the foreign exchange market.
The Swiss central bank raised its reference rate by 0.75 percentage points, from -0.25% to +0.5%. On June 16, the issuing entity took a first step towards a normalization of monetary policy with a half point rally.
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, the issuing institution “in the face of inflationary pressure that has increased again”. The SNB warned that it was not “excluded that further rate hikes may be necessary”.
Watch against the franc
Regarding the franc, the Swiss central bank stressed that it remains “ready to be active in the foreign exchange market if necessary to ensure appropriate market conditions.” Therefore, the SNB could buy or sell foreign currency to control the evolution of the national currency.
Following these announcements, the franc weakened significantly against the euro. While the currency pair had dipped below 0.95 EUR/CHF earlier in the morning, it rose to 0.9617 EUR/CHF by 09:47.
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The Swiss central bank had introduced negative rates for the first time in December 2014, by reducing the fluctuation margin of Libor, its reference rate at the time. A few weeks later, on January 15, 2015, the latter went completely into negative territory, after the elimination of the minimum rate against the euro.
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The strong franc as a shield
The SNB then wanted to prevent an appreciation of the Swiss franc by discouraging foreign investment in the Swiss currency, but also by stimulating consumption. When the cost of money is low, businesses can more easily borrow from banks.
But with inflation at its highest level in nearly 30 years, defending a strong franc is no longer a priority. It even makes it possible to contain price rises, despite the negative impact on exports. A 10% drop in the euro-franc exchange rate reduces inflation in Switzerland by half a percentage point, according to Credit Suisse estimates.
In fact, inflation has so far remained contained compared to other countries. The general consumer price index for August rose 3.5% annually in Switzerland, compared to 9.1% in the euro zone and 8.3% in the United States.
>> Also listen to Arthur Jurus analyze the challenges of the return of positive rates on Thursday night in the Forum program:
Inflation projections revised upwards
The Swiss National Bank (SNB), however, is revising its inflation projections for the current year and the next two upwards. Inflation should reach 3.0% in 2022, against 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 key rate, which the SNB has just pushed into positive territory, held at 0.5%.
The growth forecast in 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, a worsening gas shortage in Europe and an electricity shortage in Switzerland are the biggest risks.
This increase in the key rate by the SNB comes in a global context of monetary tightening to counter rising inflation. On Wednesday night, the US Federal Reserve (Fed) tightened its monetary policy again, warning that it would have to tighten further, which would be painful for households.
Thus, the Fed raised its main reference rate by three quarters of a percentage point, which now stands in a range of 3.00 to 3.25%.
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