MNI STATE OF PLAY: SNB Hikes to +0.5%, Adds Reverse Tiering

The Swiss National Bank raised its policy rate by 75bp to 0.5% on Thursday, with the expected move taking it into positive territory for the first time in almost a decade, but limited its interest payments to banks, announcing that sight deposits above individually-determined thresholds will be remunerated at zero percent.

Hikes were needed to counter a “renewed” rise in upward price pressures and the spread of inflation to previously less-affected goods and services, chairman Thomas Jordan said, with the bank predicting inflation of 3% for 2022, 2.4% for 2023 and 1.7% for 2024, assuming the current policy setting is maintained, compared with the 0-2% target range.

Further rate rises “cannot be ruled out,” Jordan said, later adding tightening is “likely.” But he would not be drawn on the size of future rate hikes, or on the potential peak in rates. The franc fell almost 2% against the euro after the decision, with the euro buying about CHF0.97, amid market commentary that some investors had bet on a larger 100-bp hike. (See MNI INTERVIEW: SNB Should Not To Hike Too Much -Ex Staffer)

The SNB’s baseline scenario is for challenging conditions to “persist for now,” Jordan said, with inflation remaining elevated “for the time being.” However, the importance of temporary factors such as supply bottlenecks is likely to diminish over the medium term, he said, with the gradual return of inflation to more moderate levels assisted by increasingly tighter monetary policy globally.

FRANC

The SNB remains “willing to be active in the foreign exchange market as necessary” in both directions, Jordan said, adding that there were no specific levels for the exchange rate that would automatically trigger a policy reaction.

The growth outlook for 2022 was revised down, from around 2.5% to 2%, amid high uncertainty and negative risk stemming in particular from a possible global economic downturn, a worsening of the gas shortage in Europe and a power shortage in Switzerland, Jordan said. Labour market developments remain positive.

The introduction of reverse tiering on sight deposits was needed to ensure effective monetary policy transmission, vice chairman Martin Schlegel said.

Excess liquidity will be absorbed via the immediate conduct of open market operations through a combination of SNB Bills and repo transactions. The SNB last issued Bills in 2011, with a typical term of up to one year. The volume of Bills issued will increase shortly through weekly auctions, Governing Board member Andrea Maechler said.