SNB Hike Ends Negative Rates, Further Increases Likely
SNB President Thomas Jordan

- Policy rate raised 75bp to 0.50% as expected

- President Jordan says “likelihood” of more tightening

- Inflation expected to remain elevated

- Bank cuts growth forecast, raises inflation outlook

- EUR/CHF spikes two cents

 

By Eric Culp, European Editor

LiveSquawk News

@EricCulpLS

 

22 September 2022 | 09:15 GMT

 

The Swiss National Bank has bid adieu to negative interest rates by raising its benchmark policy rate 75 basis points to 0.50% from -0.25%, and its top official said there is “a likelihood” of further monetary tightening.

 

This leaves Japan, which left its policy unchanged early Thursday, as the only major central bank to retain sub-zero borrowing costs amid a global tsunami of sometimes historically high rate increases. A case in point: the SNB hike came less than 24 hours after the Fed raised its benchmark rate 75bps and mere hours ahead of an expected 50bp hike by the Bank of England.

 

During Thursday’s press conference following the Swiss rate decision, SNB President Thomas Jordan prepped the market for more hikes: “There is a likelihood that monetary policy will be further tightened.”

 

The alpine central bank said the latest increase was to counter the “renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected,” a signal that the move was front-loading for possible consumer price growth ahead.

 

“It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term,” the bank said.

 

Unlike many central banks, which issue rate decisions every six weeks or so, Swiss policymakers only meet every quarter. When asked if he was worried about getting behind the rate moves of the European Central Bank, whose policies have a significant impact in neighbouring Switzerland, Jordan said the SNB board can adjust monetary policy “at any time”.

 

Analysts noted that more hikes are likely. “We expect further tightening by the SNB, especially given the clear signals from the ECB that it intends to raise rates at the next several meetings,” said Jessica Hinds, senior Europe economist at Capital Economics. “The SNB is clearly comfortable with the appreciation of the franc over the summer because it has stemmed inflationary pressure from abroad and will not want to let the rate differential with its euro-zone neighbour widen too far.”

 

The franc weakened against the single currency in Europe’s morning session Thursday, with EUR/CHF up around two cents to 0.9678 after the announcement.

 

The bank’s rate decision statement said, “To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary.”

 

Jordan outlined how that could look. “If there were to be an excessive appreciation of the Swiss franc, we would purchase foreign currency. If the Swiss franc were to weaken, however, we would consider selling foreign currency.”

 

The SNB explained that that another change Thursday was for its sight deposit holdings. They are now to be remunerated at the policy rate “up to a certain threshold. Sight deposits above this threshold are remunerated at an interest rate of zero percent.”

 

More inflation en route

The bank raised its inflation forecast for the current year and the two head. It said consumer price growth this year is expected to average 3.0%, an increase from the June forecast of 2.8%. For comparison, inflation in the Eurozone jumped to a record 9.1% in August.

 

The SNB’s inflation projection for next year was raised to 2.4% from 1.9%, and the rate for the following year moved a tenth of a point higher to 1.7%.

 

“Without today’s SNB policy rate increase, the inflation forecast would be significantly higher,” Jordan said.

The Swiss economy continues to slow, according to the bank, which cut its 2022 growth forecast to around 2%.

 

“This is roughly half a percentage point lower than at the last monetary policy assessment,” it noted.

 

Why so negative about negative rates, man?

Jordan highlighted the value of sub-zero interest rates for Switzerland since the bank introduced them in 2015 to mute the appreciation of the country’s currency. “Negative interest has proved its worth. The benefits for monetary policy clearly outweighed the costs of the side-effects."

 

“Negative interest will remain an important monetary policy instrument, which we will use if needed,” Jordan added.

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