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Switzerland Keeps the Lowest Interest Rates of The World

In: Finance, Forex

The Swiss central bank shows no sign of contemplating an increase in interest rates that are currently at -0.75, the world’s lowest.

The Swiss National Bank has allowed the franc to strengthen to a certain extent. The annual pace of consumer-price increases hit 1.9% in February in Switzerland, while in the euro area it’s more than three times higher.

Combined with the overall currency situation beyond the franc’s exchange rate with the euro that differential meant the SNB could tolerate a slight increase.

One of the reasons why in Switzerland inflation is lower than compared to the euro zone or the United States, is the fact that the SNB allowed the Franc to appreciate and at this moment there’s no need to change monetary policy and hike interest rates.

President of the SNB Thomas Jordan stated that Russia’s invasion of Ukraine has led to a strong increase in uncertainty worldwide. The forecasts for the global economy and for Switzerland are therefore subject to very high uncertainty. The risks to growth are considerable and quite negative.

Elsewhere, surging global energy costs have forced counterparts from the U.S. to the Euro zone toward tightening monetary policy. The SNB’s assessment shows both how uncertainty is now heightened by the war, but also how the strength of its currency is insulating the economy.

The SNB’s is considering taking the inflation differential into account, which indicates that policy makers may allow a certain further appreciation of the franc versus the euro, given that it is smooth.

On March 7 the Swiss Franc reached the key level of parity (1:1) with the Euro during a rush for safe havens prompted by the war. The franc since weakened and was trading at 1.02286 per euro at 1 p.m. today.

For half a decade the SNB imposed a cap on gains in the franc at 1.20 per euro until its abandonment in early 2015. Switzerland’s central bank used to be far more sensitive on the level of the currency, concerned that inflows could strengthen it excessively and strangle the country’s manufacturing exports.

The SNB’s forecasts see inflation averaging 2.1% this year, more than double the previous forecast, and 0.9% in 2023 and 2024. That projection is still well within their comfort zone for the path of consumer prices.

On economic growth, the SNB predicts about 2.5% this year, less than the 3% in its December statement.

Second-round effects could increase the risk of inflation dynamics as a result of a worsening in the tight supply of raw materials which could also lead to a further rise in inflation globally.

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