The Swiss National Bank raised its benchmark rate by 50 basis points as inflationary pressures have recently eased. Yesterday the Fed also slowed its pace of rate hikes.
The Swiss National Bank raised its benchmark interest rate by 50 basis points today to 1.0 percent to counter «increased inflationary pressure and a further spread of inflation,» the SNB said in its monetary policy assessment for December.
Today's SNB decision mirrors that of the US Federal Reserve insofar as it slowed the pace of rate increases from 75 basis points to 50. The question for central banks now is what will the terminal rate be.
Further Hikes Possible
It also does not rule out further rate hikes should they become necessary to ensure medium-term price stability. As finews.com reported earlier this week, the SNB was likely to slow the pace of its rate hikes, but not halt them completely. In one scenario, the central bank will slow the pace of its hikes to 25 basis point increments.
Also, if the Swiss franc remains somewhat or relatively strong against the euro, that will take some of the pressure off of the SNB. Another option it has for tightening policy is by unwinding its balance sheet, although no mention of that was made in today's assessment.
Swiss Franc
For the third consecutive meeting, the SNB did not include language that the Swiss franc was overvalued but did say it is willing to be active in the foreign exchange markets «as necessary.»
During introductory remarks at a press conference, SNB president Thomas Jordan pointed out that the Swiss franc appreciated around 4 percent on a trade-weighted basis which helped «ensure that less inflation has been imported from abroad, thus curbing the rise in inflation.»
The SNB sold foreign currency in recent months to ensure appropriate monetary conditions, and would not hold back from selling more if appropriate. The opposite is also true, Jordan said, with the central bank willing to buy foreign currency again «if there were to be excessive appreciation pressure.»
Inflation is Waning
Except for an upward blip in August, headline annual inflation has been coming down steadily, from 3.4 percent in June to the most recent reading of 3.0 for October and November. Moreover, core consumer price indexes which exclude seasonal products, and energy rose less than two percent annually in November, up 1.9 percent.
Still, the SNB said the 3.0 percent headline rate «is still clearly able the range the SNB equates with price stability.»
Inflation Forecasts
The central bank lowered its inflation forecast for this year to 2.9 percent, from 3.0 percent in its September assessment. For next year it maintained its forecast of 2.4 percent while increasing it to 1.8 percent from 1.7 percent for 2024.
The higher medium-term forecast is attributable to stronger inflationary pressure from abroad and the fact that price increases are spreading across the various categories of goods and services in the consumer price index, the SNB said.
The Global Economy
Global economic growth is likely to be weak in the coming quarters, and inflation will remain elevated for the time being. Over the medium term, however, inflation abroad should return to more moderate levels, not least due to the increasingly tighter monetary policy in many countries.
This is subject to significant risks, with the possibility of the European energy worsening, and high inflation could become embedded and require renewed stronger monetary policy responses abroad. Finally, the coronavirus pandemic remains an important source of risk for the global economy
Swiss Economy
The SNB viewed the Swiss economic growth as remaining modest, and although many service industries fared well, there was a renewed, if slight, decline in value-added manufacturing.
This year, GDP growth is expected to be 2.0 percent on an annual basis, but weaker demand from abroad and high energy prices are seen as dampening activity. With that, the SNB sees GDP growth moderating to 0.5 percent next year.
Employment remains a bright spot as it continued to rise while unemployment decreased slightly.
Other Central Banks
In the US, the Federal Reserve slowed the pace of its hikes, raising rates by 50 basis points, as expected, to a range of 4.25 to 4.50 percent. Later today, the European Central Bank (ECB) and the Bank of England (BoE) are also expected to raise their benchmark rates by 50 basis points. Like the Fed, they also hiked rates by 75 basis points at their previous meetings.
Today's rate hike comes into effect tomorrow.
