GENEVA (AP) – The Swiss central bank made the largest-ever hike in its key interest rate on Thursday, following the U.S. Federal Reserve and other central banks around the world in aggressive moves to fight back. against inflation.
The Swiss National Bank could not rule out that further increases beyond the three-quarters percentage point hike “will be necessary to ensure price stability in the medium term,” said Thomas Jordan, chairman of the board. of the SNB.
It aims to calm inflation which stood at 3.5% in August, which is well below the record of 9.1% recorded in the 19 neighboring countries of the European Union which use the euro.
The Swiss rate fell from minus 0.25% to 0.5%, ending several years of negative interest rates – a testament to the stable growth, low inflation environment, coupled with the attractiveness of Switzerland as a safe haven for assets.
Essentially, this negative interest rate environment meant that people parking assets in Switzerland were paying for the privilege, a counter-intuitive idea for many investors who might expect a return on their savings.
Some economists have said that Switzerland appears less vulnerable to inflationary pressures because the cost of living in the wealthy Alpine country is relatively high compared to its main neighbours: European Union countries.
A recent surge in the value of the Swiss franc against the euro, for example, has prompted many Swiss consumers to cross the border into neighboring countries such as France or Germany to buy gasoline and other consumer goods that are suddenly relatively cheaper there.
Jordan said the bank would “intervene in foreign exchange markets to steer monetary conditions” if “exchange rate movements are excessive such that you have a massive appreciation” of the franc.
The Swiss currency fell more than 1% against the euro after the bank’s announcement, with economists saying some investors might have expected an even bigger rise.
The move comes a day after the Fed raised its key rate by three-quarters of a point for the third consecutive time and signaled that more hikes were to come.
The European Central Bank also rose all the way earlier this month, and the Bank of England is under pressure to act aggressively at its meeting on Thursday.
Switzerland is not a member of the EU, but most of its economic activity is done with the giant bloc of 27 nations.
Relations between Switzerland and the EU have been strained in recent years over issues such as more than 100 bilateral agreements that both sides have struggled to renew and demands by some populist politicians in Switzerland to limit the number of citizens from the EU who can live and work in the country. This concept greatly disturbs Brussels, because one of the central principles of the EU is the free movement of people within the territory of its member states and with other partners in the so-called Schengen zone.
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