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Swiss central bank hikes interest rate despite banking turmoil

The SNB raised the interest rate in December 2022 to 1%. © Keystone / Peter Schneider

The Swiss National Bank (SNB) announced it was raising the benchmark interest rate on Thursday by 0.5 percentage points to 1.5% in a move to curb inflationary pressure.

The move came a day after the United States Federal Reserve said it was raising the benchmark interest rate a quarter of a percentage point to a range of 4.75% to 5% – its ninth consecutive rate rise and the highest rate since 2007.

Last month inflation in Switzerland, while lower than in the US and European neighbours, accelerated more than economists forecast. Consumer prices increased 3.4% in February from a year earlier, according to the Federal Office of Statistics. This was well above the SNB target rate for price stability, defined as between 0-2%.

Despite the slight upturn in economic activity in recent months, the SNB wroteExternal link that “growth is likely to remain modest for the rest of the year. The subdued demand from abroad and the loss of purchasing power due to inflation are having a dampening effect”.

The decision to raise rates comes despite turmoil in the banking sector both abroad and in Switzerland. On March 19, UBS agreed to take over ailing rival Credit Suisse after a frantic last-ditch government-backed deal to prevent a catastrophic banking collapse.

SNB acknowledged this when announcing the rate hike, saying that the measures by the federal government, the Swiss financial regulator FINMA and the SNB “have put a halt to the crisis.” The SNB is providing large amounts of liquidity assistance in Swiss francs and foreign currencies. “These loans are backed by collateral and subject to interest.”

Under the government-orchestrated deal, the SNB agreed to smooth the transaction by providing CHF100 billion ($109 billion) in liquidity to UBS and Credit Suisse during the takeover. The government has agreed to absorb up to CHF9 billion of potential UBS losses.

In a press conference on Thursday, SNB President Thomas Jordan, said the measures were needed to “contain the crisis,” emphasising that the liquidity measures and loans are secured and bear interest. “They are not gifts,” said Jordan.

+ How the Swiss government orchestrated the UBS takeover of Credit Suisse

Last December, the SNB increased the benchmark interest rate to 1% to counter the spread of inflation. This was the third time in a year the bank raised the interest rate amid rising prices.

The interest rate hike on Thursday took Swiss interest rates to their highest level since the global financial crisis, 14 years ago. Swiss interest rates moved into positive territory in September for the first time since 2015.

This article was amended to include comments from SNB President.

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SWI - a branch of Swiss Broadcasting Corporation SRG SSR

SWI - a branch of Swiss Broadcasting Corporation SRG SSR