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By Nicole Willing
Edited by Vanessa Kintu
13:02, 14 October 2022
Switzerland no longer has the world’s lowest interest rates. With inflation running high in many countries and central banks rapidly hiking interest rates, the Swiss National Bank (SNB) raised its key policy rate out of negative territory in September for the first time since January 2015. The last time the bank raised interest was in 2007.
While inflation in Switzerland came in at 3.5% in August, above the SNB’s target of 0%-2%, prices are rising much higher in other countries – around 9%-10% in the eurozone, US and UK.
So what are the drivers for higher interest rates in Switzerland? Will the SNB raise rates further? In this article we look at the outlook for Swiss interest rates.
The Schweizerische Nationalbank (Swiss National Bank) is the central bank of Switzerland, tasked with implementing the country’s monetary policy as an independent entity. The bank’s mandate is to maintain price stability, meaning a low and stable rate of inflation.
The SNB implements its monetary policy by setting the key Switzerland interest rate as a reference for the country’s financial institutions, to keep short-term Swiss franc (CHF) money market rates close to the policy rate. The bank also intervenes in the foreign exchange market as necessary to influence monetary conditions by managing the country’s foreign currency reserves.
The SNB issues Switzerland’s banknotes and coins and is involved in the Swiss Interbank Clearing (SIC) payment system for cashless payments.
The SNB surprised the financial markets on 16 June when it raised Swiss bank rates for the first time in 15 years, moving the policy rate up by 50 basis points to -0.25% and indicating that there would be more hikes to come.
The SNB makes monetary policy decisions quarterly, rather than monthly like some other central banks, so the next hike came on 22 September. It moved the rate up by 75 basis points to 0.5%, putting an end to negative interest rates in Switzerland.
Switzerland was the last European country with a negative interest rate, as the ECB moved eurozone rates out of negative territory in July and hiked again on 14 September to 0.75%.
According to an analysis by Dutch bank ING:
The SNB said that in raising rates it is “countering the renewed rise in inflationary pressure and the spread of inflation to goods and services that have so far been less affected”.
The bank expects inflation “to remain at an elevated level for the time being. The latest rise in inflation is principally due to higher prices for goods, especially energy and food.”
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The SNB has revised its average annual inflation forecasts, which it now expects to be 3% for 2022, 2.4% for 2023 and 1.7% for 2024.
The SNB revised down its gross domestic product (GDP) growth forecast to 2% for this year, down from its previous forecast of 2.5%. “The level of uncertainty associated with the forecast remains high. The biggest risks are a global economic downturn, a worsening of the gas shortage in Europe and a power shortage in Switzerland. Furthermore, a resurgence of the coronavirus pandemic cannot be ruled out.”
In a change to its foreign currency policy, the central bank halted its currency purchases to curb strength in the Swiss franc, selling CHF5m ($4.9m) worth during the second quarter, after buying CHF353bn over the past seven years.
In 2020, the SNB bought CHF112bn in foreign currency to limit a strengthening in the franc as investors used it as a safe haven asset on concerns about the impact of the Covid-19 pandemic.
But the bank has shifted its policy, becoming less concerned about currency appreciation than inflation, which while lower than other countries was at its highest level in 29 years in August. This is part because the higher inflation overseas has reduced the impact of the strong franc on Swiss exports and has limited the increase in prices for imported products.
Given that the SNB has not ruled out future rate hikes, what is the latest Switzerland interest rate outlook? When should investors expect the next Switzerland interest rate rise?
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ING’s analysts expect another Switzerland interest rate rise by the end of the year:
“Given the inflation forecasts, there is little doubt that the SNB will continue to raise rates in the future,” the analysts wrote after the September hike.
An analysis by data provider Trading Economics predicted Swiss bank rates could remain at 0.50% for the rest of the year. But it did forecast a Switzerland interest rate rise in 2023, trending around 2% before moving back to 1% in 2024, according to its econometric models.
French bank Societe Generale expected Swiss central bank interest rates to rise by another 25 basis points in December to 0.75%. The bank further forecast the SNB could continue raising rates in 2023, to 1% in the first quarter, 1.25% in the second quarter and 1.50% in the third quarter.
SocGen forecasts a further rise in Swiss banking interest rates to an average of 1.75% from 2024 to 2026, according to the forecast data.
Note that analysts’ predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research.
Analysts expect the Swiss National Bank to raise interest rates again at its next monetary policy meeting in December.
At the time of writing, the key policy rate in Switzerland was last raised by 75 basis points to 0.5% on 22 September.
Interest rates in Switzerland had been negative since January 2015.
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