Swiss Central Bank Hikes Rate For First Time Since 2007

The Swiss National Bank on Thursday raised its key interest rate unexpectedly for the first time since 2007, joining its peers in the battle against runaway inflation.

The central bank raised the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to -0.25 percent from -0.75 percent.

"It cannot be ruled out that further increases in the SNB policy rate will be necessary in the foreseeable future to stabilize inflation in the range consistent with price stability over the medium term," the bank said in the statement.

The SNB's surprise move came after the major central banks around the globe moved towards tightening. The U.S. Federal Reserve on Wednesday raised the target rate for the federal funds rate by 75 basis points to 1.50 percent to 1.75 percent, which was the biggest rate hike since 1994. The ECB last week announced its intention to hike the rate by a quarter point in July.

The SNB said it is willing to be active in the foreign exchange market as necessary, adding that it does no longer consider the Swiss franc as highly valued.

SNB President Thomas Jordan said the rate was raised as there are now signs of inflation also spreading to goods and services that are not directly affected by the war in Ukraine and the consequences of the pandemic.

Given its history of unscheduled announcements, it is more likely than not that the Bank will raise rates again, to zero or even into positive territory, before the next scheduled meeting, in September, Capital Economics economist David Oxley said.

Raising rates now means that the SNB does not have to rush into major rate hikes later on and retains the initiative, ING economists said.

This gives the SNB room to manoeuvre in deciding what to do in September, depending on data developments and the global economic and geopolitical situation, they added.

The central bank also adjusted the threshold factor used to calculate the level of banks' sight deposits at the SNB exempt from negative interest.

The SNB raised its inflation forecast, citing global factors. The inflation projection for this year was raised to 2.8 percent from 2.1 percent.

Similarly, the forecast for 2023 was lifted to 1.9 percent and that for 2024 to 1.6 percent, from 0.9 percent estimated for both 2023 and 2024.

In May, inflation rose to 2.9 percent, the highest since September 2008. The main reason for the higher inflation was the surge in prices of oil products, food and goods affected by the global supply bottlenecks.

The war in Ukraine had comparatively little adverse impact on economic activity in Switzerland. For 2022, the SNB forecast GDP growth of around 2.5 percent.

Regarding the property market, the SNB said mortgage lending and residential property prices increased further in recent quarters. The SNB will continue to monitor developments on the mortgage and real estate markets closely.