The Swiss National Bank (SNB) has announced a 50 basis point increase in its main interest rate to 1.5% effective from Friday, citing renewed inflationary pressures and the recent takeover of Credit Suisse by rival UBS as the reasons behind the decision.
While Switzerland’s inflation is relatively low, it has been rising since the beginning of the year and reached 3.4% in February due to higher electricity, tourism services, and food prices.
The SNB said that further policy rate increases might be necessary to ensure price stability over the medium term.
Switzerland’s Interest Rate Gap With Other Advanced Economies Widens
The SNB’s decision to raise the interest rate has widened the policy gap between Switzerland and other advanced economies.
Other countries have been hiking rates for over a year, with their rates standing at around triple that of the SNB.
However, the bank emphasized that inflation in Switzerland was still clearly above the 0% to 2% range it equated with price stability.
Credit Suisse Takeover Halted ‘Crisis’
The SNB’s announcement follows its $3.2 billion emergency deal to take over Credit Suisse after the bank’s confidence was severely hit by the collapse of two US banks, the Silicon Valley Bank and Signature Bank.
The chairman of the Saudi National Bank also publicly stated that it would not increase its support.
The SNB emphasized that the measures announced at the weekend by the federal government, the Financial Market Supervisory Authority, and the SNB had put a halt to the crisis.
Regulator Orders Credit Suisse to Write Down $17 Billion Worth of Junior Bonds
The regulator, FINMA, has ordered Credit Suisse to write down to zero $17 billion worth of junior bonds, so-called AT1 bonds, as part of the takeover by UBS.
The contract holders of Credit Suisse bonds entered into stipulated that the bonds would be completely written down in a “Viability Event,” particularly if extraordinary government support was granted. Credit Suisse’s acceptance of a $55 billion loan from the central bank, secured by a federal default guarantee, meant that those conditions were met for its AT1 instruments.
The government also enacted an emergency law on liquidity assistance loans and federal default guarantees to systemically important banks, giving FINMA the power to order the borrower to write down bonds.
SNB Remains Willing to Intervene in the Foreign Exchange Market
The SNB emphasized that it remained willing to intervene in the foreign exchange market as necessary to provide appropriate monetary conditions, reversing foreign currency selling seen over recent quarters.
The bank also clarified that banks’ sight deposits held at the SNB would be remunerated at the SNB policy rate of 1.5% up to a certain threshold, while sight deposits above this threshold would be remunerated at an interest rate of 1.0%, still at a discount of 0.5 percentage points relative to the SNB policy rate.
Final Thoughts
The SNB’s decision to hike the interest rate to 1.5% has been taken to counter renewed inflationary pressure and the takeover of Credit Suisse by UBS.
The move has widened the policy gap between Switzerland and other advanced economies.
FINMA’s order to write down to zero $17 billion worth of junior bonds was a result of contractual agreements and the emergency ordinance enacted by the government.
The SNB remains willing to intervene in the foreign exchange market as necessary to provide appropriate monetary conditions.
