On Thursday, the Swiss National Bank (SNB) took the markets by complete surprise when it decided to increase its interest rate for the first time in the last 15 years. As a matter of fact, the bank reiterated that it was prepared to take the rates higher, as it joined the slew of other global central banks in tightening monetary policy in order to quell the surging inflation in the country.
Interest Rate Up by 50 Basis Points
The interest rate of the central bank was -0.75% before the rate hike and it was adjusted to -0.25%. This pushed up the price of the Swiss franc, which is considered a safe-haven currency. Almost all market experts had expected the SNB to keep its rates on hold, but announce a hike for the next meeting. Therefore, the move came as a big surprise and is the first hike to be seen since September 2007. It came after the US Federal Reserve announced its own hike of 75 basis points a day earlier.
Other central banks are also following the same route in order to cool the inflation numbers that seem to be getting hotter because of the rising prices of food and fuel that are causing budgetary problems for businesses and households alike. The Bank of England also announced its own hike later in the day, after the SNB, but it was by 25 basis points.
Last week, the European Central Bank (ECB) had also signaled that it would hike the interest rates in its next meeting in July to control euro zone inflation that reached 8.1% in the previous month.
SNB Expects Inflation to Rise
Thomas Jordan, the Chairman of the Swiss National Bank (SNB) stated that the central bank may have to take action again due to surging inflation in the country, which hit the highest level in 14 years last month. Even after the interest rate hike of 50 basis points, the SNB believes that inflation would reach 2.1% in the first quarter of 2025, putting it outside of the bank’s target rate of 0% to 2%.
This year, the bank is expecting the inflation to reach 2.8%. Jordan said that if they had not increased the interest rate now, the inflation forecast would have been higher. He added that this forecast also shows that they may have to increase interest rates more in the future. But, he did not mention when this would occur, or by how much.
He said that they could not offer any precise guidance for the future, but they will take the measures necessary to prevent inflation from going over 2%. Analysts believe there will be additional hikes soon. They said that the SNB had turned hawkish, which means they do not believe that Swiss franc is overvalued and would do their best to ensure price stability.
Market analysts predicted that the SNB could raise their rates to zero, or even enter positive territory by its meeting in September. Others believe the hike would be 25 basis points for the next few times.