MNI STATE OF PLAY: SNB Raises Rates By 50bps, More May Follow

The Swiss National Bank raised the interest rate on sight deposits by 50 basis points to -0.25% on Thursday - its first increase since 2007 - and said more tightening cannot be ruled out, surprising analysts who had predicted a first 25 basis-point hike in September.

In its statement, the SNB also omitted a previous reference to the franc as “highly valued” in March, and dropped its explicit commitment to countering upward pressure on the currency, though it added that remains willing to be active in the foreign exchange market as necessary.

“The new inflation forecast shows that further increases in the SNB policy rate may be necessary in the foreseeable future to stabilise inflation in the range consistent with price stability over the medium term,” the SNB said.

Assuming a policy rate of -0.25%, annual inflation is expected be 2.8% in 2022, 1.9% in 2023 and 1.6% in 2024, with the statement noting that “without today’s SNB policy rate increase, the inflation forecast would be significantly higher.”

Asked under what conditions the SNB would tighten further, chairman Thomas Jordan said he would do whatever was necessary to ensure that inflation remains within the price stability target range of 0-2% over the medium term.

“We do not make any precise forecasts regarding rate increases or cuts. We will decide from quarter to quarter. But the goal is clear,” he said, stressing the Bank’s independence after a week in which markets were unsettled by a 75-basis-point rate increase by the Federal Reserve.

FRANC NO LONGER HIGHLY VALUED

The depreciation of the franc in trade-weighted terms, in addition to higher global inflation, meant that the currency is no longer highly valued, Jordan said in in his introductory remarks to the press conference.

“The current environment is subject to great uncertainty, also with regard to exchange rate developments. If there were to be an excessive appreciation of the Swiss franc, we would be prepared to purchase foreign currency. If the Swiss franc were to weaken, however, we would also consider selling foreign currency,” he said.

The SNB’s baseline scenario assumes that the impact of the war in Ukraine on domestic economic activity and inflation will be temporary and moderate, with annual growth projected to be “around 2.5%,” compared with the 2.5% seen in March - a forecast the SNB described as “favourable.”

Yet large risks to the growth outlook and financial stability stemming from the war in Ukraine remain, the Bank said. Combined with the U.S. rate hike, with more likely to follow, financial market uncertainty has increased and growth expectations have become dampened, it continued.

The SNB also lowered the threshold factor used to calculate the level of banks’ sight deposits from negative interest rates from 30 to 28 as of July 1, it said.