Swiss Central Bank Hikes Interest Rates Despite Credit Suisse Turmoil

View of the Swiss National Bank in Zurich, Switzerland, on June 23, 2022. Arnd Wiegmann/Reuters

The Swiss National Bank (SNB) raised its interest rates by 50 basis points despite the turmoil over the Credit Suisse collapse.

The SNB made the announcement on March 23, bringing its borrowing rate to 1.5 percent, for its fourth consecutive hike, which was is in line with analysts’ predictions

Swiss interests rates were negative 75 percent until June, when the central bank started to hike interest rates for the first time in 15 years due to rising inflation. The country’s interest rates first moved out of negative territory in September with a 75 basis-point hike.

Monetary policy was even tightened further this month to counter “the renewed increase in inflationary pressure,” the central bank said in a press release. The bank stated that further tightening “cannot be ruled out ... to ensure price stability over the medium term.”

Average annual inflation is predicted to hit 2.6 percent in 2023 and fall to around 2 percent over the following two years, according to a forecast by the Swiss National Bank, with inflation expected to reach at 2.1 percent by the end of 2025.

So far, Swiss domestic inflation remains well above the SNB’s target of between 0.0–2.0 percent, as it rose to 3.4 percent in February year over year, which was higher than most analysts’ expectations.

However, the country’s consumer price inflation rate is just a fraction that of the eurozone, which rose to 8.5 percent in February, year over year, which is more than four times the European Central Bank’s target of 2.0 percent.

The Swiss central bank hinted there could be further rate hikes if inflationary pressures continue, and that it was willing to be active in the foreign exchange market if necessary.

“It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term,” central bank policymakers said in December.

“To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary,” they added.

Swiss Economy Remains Sluggish

Meanwhile, the Swiss economy continues to be sluggish, but unemployment remains low, according to the central bank.

“Swiss GDP stagnated in the fourth quarter. The services sector lost momentum, and value added in manufacturing declined slightly again,” it said in the press release.

“For 2022 as a whole, GDP grew by 2.1 percent. The labor market remained robust, and overall production capacity has been well utilized.”

“The subdued demand from abroad and the loss of purchasing power due to inflation are having a dampening effect. Overall, GDP is likely to increase by around 1 percent this year,” they concluded.

The SNB noted that the weakness of the mortgage and real estate markets will continue to persist.

“The global economy is subject to significant risks, in particular due to the recent turmoil in the global financial sector,” said SNB.

Credit Suisse Scandal Puts Spotlight On Swiss Banking

The central bank has been in the global spotlight over the past week after it agreed to lend the troubled lender Credit Suisse up to $53.68 billion before its collapse, but was later forced to order UBS to take over the bank when it failed on March 19.

Shares of the lender had tumbled on news that its biggest investor, Saudi National Bank, would not provide any future financial assistance, which choked off one of its key lines of liquidity,

The end came after years of multiple embarrassing scandals and losses for Credit Suisse, including poor investment performance, a toxic office culture, and mounting litigation costs, which continued to hit its earnings.

There was also a bizarre spying scandal, which took out several top executives and caused the suicide of a private investigator.

In 2022, the bank was caught after leaked data allegedly showed that it had served human rights abusers, corrupt politicians, drug dealers, money launderers, and sanctioned businessmen for decades.

“The past week has been marked by the events surrounding Credit Suisse. The measures announced at the weekend by the federal government, FINMA [Financial Market Supervisory Authority], and the SNB have put a halt to the crisis,” said the Swiss central bank.

“The SNB is providing large amounts of liquidity assistance in Swiss francs and foreign currencies. These loans are secured and subject to interest,” they added.