Inflationary pressure prompts Swiss National Bank to raise interest rates to 1.75%

June 22 (UPI) -- Swiss National Bank Thursday decided to further tighten monetary policy to fight inflation by raising interest rates by 0.25 percentage points to 1.75%.

That policy rate change is effective Friday as the bank said Swiss inflation was 2.2% in May and that inflation was increasing over the medium term.

"The lower oil and gas prices and the stronger Swiss franc are having a dampening effect over the short term," Swiss National Bank said in a statement. "From 2024 onwards, the new forecast is higher than in March, despite today's increase in the SNB policy rate. The reasons for this are ongoing second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad."

Swiss National Bank's statement said the growth outlook for the global economy in coming quarters "remains subdued."

"This scenario for the global economy remains subject to large risks. In particular, the high level of inflation in some countries could be more persistent than expected. Equally, the energy situation in Europe could deteriorate again in Q4 2023 and Q1 2024," SNB said.

SNB said emergency assistance to Credit Suisse during that global bank's crisis impacted the liquidity supply in the Swiss franc money market.

"The SNB provided ample liquidity to Credit Suisse in the form of interest-bearing loans, which led to an increase in sight deposits. Due to outflows of customer deposits at Credit Suisse, some of this liquidity also reached other institutions in the financial system. This increased the supply of liquidity in the Swiss franc money market," the governing board said in a statement.

But the board said SNB was determined to not let the aid to Credit Suisse influence SNB's overall monetary policy stance.

"We therefore consistently continued with our regular monetary policy implementation in the Swiss franc money market," the governing board said. "To ensure that the secured short-term Swiss franc money market rates do not fall and that they remain close to the SNB policy rate despite the additional liquidity in the Swiss franc money market, we have reduced the increased liquidity supply via open market operations."

As SNB moves to stabilize inflation, Switzerland's Federal Department of Finance earlier this month signed a $10 billion loss protection agreement with UBS for loss exposure in the takeover of Credit Suisse to help stabilize banking.

The deal only gets triggered if USB sustains more than $5.5 billion in losses. The merger of the global Swiss banking giants after Credit Suisse failed shook European markets with steep losses.

UBS has announced the banks are now fully merged and will operate as a consolidated banking group.

As Swiss National Bank seeks lower inflation it reported Thursday that economic growth was modest in the first quarter of 2023.

"Although inflation declined again in many countries, it remains clearly above central banks' targets. Core inflation in particular is still stubbornly elevated," SNB said.

SNB said the forecast for Switzerland and for the global economy "is subject to high uncertainty" with the main risk being a more pronounced economic slowdown abroad.