End of negative interest rates in Switzerland: SNB raises key interest rates

In Switzerland, the era of negative interest rates is coming to an end after almost eight years. the Swiss National Bank (SNB) will increase key interest rates by 0.75 percentage points to 0.5 percent starting this Friday. "In this way, we are counteracting the renewed increase in inflationary pressure and making it more difficult for goods and services to spread to goods and services that have so far been less affected by inflation," said SNB President Thomas Jordan at a press conference in Zurich on Thursday morning. "It cannot be ruled out that further interest rate hikes will be necessary to ensure price stability in the medium term," Jordan added.

Inflation in the Switzerland was 3.5 percent in August. Although that is significantly less than in the euro zone (9.1 percent), it is still well above the target corridor of 0 to 2 percent, which means price stability for the SNB. In June, the National Bank had already increased the key interest rate, which had been a record low of minus 0.75 percent since the beginning of 2015, by half a percentage point. The SNB introduced negative interest rates after the euro exchange rate floor was lifted in order to counteract an appreciation of the Swiss currency. According to Jordan, he also helped ensure price stability.

Comparatively low inflation in Switzerland

The President of the National Bank sees signs that price increases are increasingly spreading to goods and services that are not directly affected by the war in Ukraine or the consequences of the pandemic. In addition, the rising energy prices increased the inflationary pressure. This increases the risk of second-round effects. Therefore, a further tightening of monetary policy is appropriate. The SNB is now anticipating inflation of 3.4 percent for the fourth quarter of 2022. In June, the central bank had still expected an increase in consumer prices of 3.0 percent for this period. The central bank expects inflation to average 2.4 percent for the coming year; for 2024 it announced 1.7 percent. "Without today's rate hike, the inflation forecast would be significantly higher," he said Jordan.

SNB President Thomas Jordan

SNB President Thomas Jordan

Image: dpa

For the comparatively small inflation in Switzerland there are several reasons. The strength of the Swiss currency plays an important role. A franc is now worth more than a euro; currently you get 0.95 francs for one euro. This has to do with the nimbus of the Swiss currency as a safe haven in uncertain times. More than that, however, it reflects the weakness of the common currency, which is suffering from the gloomy outlook for the European economy. The strong franc makes imports into Switzerland cheaper and thus curbs inflation.

The country also benefits from the cheaper energy mix: a large part of the electricity required comes from domestic hydro and nuclear power. In addition, the Swiss economy is comparatively energy-efficient. According to the economic umbrella organization Economiesuisse, more than twice as much energy is required in Germany for the production of goods and services as in Switzerland. What's more, energy expenditure is much less important in the shopping basket of Swiss households than elsewhere. Higher oil and gas prices are therefore less reflected in the inflation rate.

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