Swiss central bank ups interest rates, strikes hawkish tone

The Swiss National Bank increased the cost of borrowing for the fifth time on Thursday, as it looked to get inflation under control.

The central bank raised its policy rate by 0.25 percentage points, to 1.75%. That was the smallest increase in the current rate-setting cycle, following two 50 basis point rises in March and December, and two 75 basis point rises in June and September last year.

However, it made it clear that further rises remained possible, noting: “It cannot be ruled out that additional rises in the policy rate will be necessary to ensure price stability over the medium that further rises could not be ruled out.”

The SNB said that while inflation had declined “significantly” in recently months, it remained above target. Swiss inflation was 2.2% in May, down from the 3.4% it reached in February.

The Zurich-based bank lowered its inflation forecast for the remainder of 2023, on the back of lower oil and gas prices and the stronger Swiss franc. But it upped forecasts for 2024 and the first half of 2025 due to “ongoing second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad”. It now expects inflation to average 2.2% in 2025 and 2.1% in 2025.

Its 2023 GDP growth forecast was unchanged at “around” 1%.

Melanie Debono, senior Europe economist at Pantheon Macroeconomics, said: “The case for a rate hike at this meeting, based on the inflation data, was clear: inflation has remained above the bank’s ‘below 2%’ since its last meeting.

“We think at least one more rate hike is coming. The bank continues to strike a hawkish tone, and left its inflation estimate for the end of its forecast horizon – now the first quarter of 2026 – above target.”

ING said: “Despite this encouraging decline [in inflation], the SNB continues to see inflation as a problem and expects it to strengthen over the coming winter.

“Inflation is also expected to become increasingly domestic, and therefore less easily combatted by strengthening the exchange rate.”