GENEVA (AFP) – The Swiss central bank made its largest-ever increase in its key interest rate on Thursday, following the US Federal Reserve. And other central banks around the world are in aggressive moves to clamp down on inflation.
The Swiss National Bank said it could not rule out another increase beyond a three-quarter percentage point rise “to ensure price stability in the medium term”. It aims to cool inflation, which hit 3.5% in August.
The rate rose from 0.25% to 0.5%, ending several years of negative interest rates in Switzerland – evidence of stable growth, a low inflation environment, along with Switzerland’s attractiveness as an asset safe haven.
In essence, the negative interest rate environment means that the people who parked assets in Switzerland paid for the privilege, a counterintuitive notion for many investors who might expect a return on their savings.
Some economists said Switzerland seemed less vulnerable to inflationary pressures because the cost of living in the rich alpine country is relatively high compared to its main neighbours: the European Union. Inflation in the 19 countries using the euro currency hit a record 9.1% in August.
The recent appreciation of the Swiss franc relative to the euro, for example, has caused many Swiss consumers to cross borders into neighboring countries such as France or Germany to buy gasoline and other consumer goods that suddenly become relatively less expensive there.
The Swiss bank’s move comes a day after the Federal Reserve raised its key rate by three-quarters of a point for the third time in a row, and indicated more increases are ahead.
European Central Bank This also rose a lot earlier this month, and the Bank of England is under pressure to move aggressively at its meeting on Thursday.
Switzerland is not a member of the European Union, but most of its economic activity takes place with the giant bloc of 27 countries.
Relations between Switzerland and the European Union have soured in recent years over issues including 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 EU citizens who can live and work in the country. This concept greatly worries Brussels, because one of the central principles of the European Union is the free movement of people within the territory of its member states and with other partners in the so-called Schengen area.