Inflation in Europe: Swiss National Bank Raises Interest Rate by 50 Points

The entrance to the Swiss National Bank is pictured in Berne, Switzerland, on July 16, 2012. (AP Photo/Keystone, Gaetan Bally)

The Swiss National Bank (SNB) raised its policy interest rate on June 16 for the first time in 15 years as it attempts to fight off inflation. The increase takes effect on June 17.

“The SNB is tightening its monetary policy and is raising the SNB policy rate and the interest rate on sight deposits at the SNB by half a percentage point to −0.25 percent to counter increased inflationary pressure. The tighter monetary policy is aimed at preventing inflation from spreading more broadly to goods and services in Switzerland,” the bank said in a June 16 statement.

“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.”

Inflation hit 2.9 percent in May. The SNB expects inflation to remain at elevated levels “for the time being.” The Swiss bank predicts inflation to be at 2.8 percent for 2022, 1.9 percent for 2023, and 1.6 percent for 2024. If SNB hadn’t announced the 50 basis point policy rate boost, the inflation forecast would have been “significantly higher.”

Global growth is being hampered by high inflation, the war in Ukraine, and the COVID-19 lockdowns in China, SNB said. While the bank calculates energy prices to remain high for now, it isn’t expecting any “acute energy shortage” in major economic regions. As a result, positive economic development “should continue overall.”

Switzerland’s gross domestic product (GDP) rose by less than 2 percent in the first quarter of 2022, following modest growth in the previous quarter. Signals remain “positive” for the current quarter, the bank said while adding that the labor market is also improving.

The SNB is expecting GDP for 2022 to be around 2.5 percent and unemployment to “likely remain low” provided the global economy grows and the war in Ukraine does not escalate any further.

The SNB’s decision comes after the European Central Bank (ECB) announced last week that it will raise interest rates by 25 basis points in July, the first time in 11 years. A bigger hike in September could follow if required, the ECB had said.

The announcement worried investors, leading to a sharp sell-off in the European bond market. The ECB then convened an emergency meeting on June 15, promising a new tool to tackle the potential risk of Eurozone bond fragmentation.

The ECB had already slashed growth projections for the year. The bank expects the region to grow at 2.8 percent in 2022 as against earlier projections of 3.7 percent. Inflation is expected to be at 6.8 percent, up from 5.1 percent the bank had earlier forecast.

Meanwhile, the U.S. Federal Reserve raised its benchmark interest rate by 75 basis points on June 15—the largest rate increase since November 1994—as part of its attempt to rein in inflation. Twelve-month U.S. inflation was at 8.6 percent in May, the highest year-on-year increase since 1981.