GENEVA (AP) – Switzerland’s central bank carried out the biggest hike ever to its key interest rate yesterday, following the United States (US) Federal Reserve and other central banks around the world in aggressive moves to clamp down on inflation.
The Swiss National Bank said it could not rule out further increases beyond the rise of three-quarters of a percentage point “to ensure price stability over the medium term”. It aims to cool off inflation that came in at 3.5 per cent in August.
The rate increased from minus 0.25 per cent to 0.5 per cent, ending several years of negative interest rates in Switzerland – a testament to the stable growth, low-inflation environment, coupled with Switzerland’s appeal as a safe haven for assets.
In essence, that negative interest rate environment meant that people who parked assets in Switzerland paid for the privilege, a counterintuitive idea for many investors who might expect a return on their savings.
Some economists have said that Switzerland appeared less vulnerable to inflation pressures because the cost of living in the wealthy Alpine country is relatively high compared to its main neighbours: European Union (EU) countries. Inflation in the 19 countries that use the euro currency hit a record 9.1 per cent in August.
A recent surge in the value of the Swiss franc compared to the euro, for example, has caused many Swiss consumers to cross the border into neighbouring countries like France or Germany to buy gasoline and other consumer goods that suddenly are relatively less expensive there.
The Swiss bank’s move comes a day after the Fed raised its key rate by three-quarters of a point for the third consecutive time and signalled that more increases were ahead. The European Central Bank also hiked by that much earlier this month, and the Bank of England is under pressure to move aggressively at its meeting yesterday.
Switzerland is not an EU member, but most of its economic activity is done with the giant 27-nation bloc.