March 23 (UPI) — Switzerland’s central bank raised its key interest rate by 0.5% Thursday amid renewed inflationary pressures and in the wake of the rescue of the country’s second-largest bank at the weekend.
The increase to 1.5% effective Friday leaves a significant policy gap with other advanced economies which for more than a year have been hiking rates to around triple those of the Swiss National Bank, although inflation in Switzerland is relatively low.
In taking the step to counter a renewed increase in inflationary pressure, the bank said it could not rule out further increases to its policy rate would be necessary to ensure price stability over the medium term.
Swiss inflation has been rising since the beginning of the year reaching 3.4% in February, driven by higher electricity, tourism services and food prices.
SNB said that while price increases were now broad-based, inflation was clearly still above the 0% to 2% range it equated with price stability.
The rate hike comes after SNB on Sunday announced a $3.2 billion emergency deal to take over Credit Suisse as confidence in the bank plummeted after the collapse of two U.S. banks, the Silicon Valley Bank and Signature Bank, and the chairman of the Saudi National Bank saying publicly that it would not increase its support.
“The past week has been marked by the events surrounding Credit Suisse. The measures announced at the weekend by the federal government, the Financial Market Supervisory Authority and the SNB have put a halt to the crisis,” the central bank said.
“The SNB is providing large amounts of liquidity assistance in Swiss francs and foreign currencies. These loans are secured and subject to interest.”
It stressed it remains willing to intervene in the foreign exchange market as necessary to “provide appropriate money conditions,” reversing foreign currency selling seen over recent quarters.
FINMA on Thursday also sought to explain a decision to order 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 regulator said the contract holders of Credit Suisse bonds entered into stipulated that the bonds would be completely written down in a “Viability Event,” in particular, 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 those conditions were met for its AT1 instruments.
The government also enacted an emergency law Sunday on liquidity assistance Loans and federal default guarantees to systemically important banks that gave FINMA the power to order the borrower to write down bonds.
Based on the contractual agreements and the emergency ordinance, FINMA instructed Credit Suisse to write down the AT1 bonds.
“On Sunday, a solution could be found to protect clients, the financial center and the markets,” said FINMA CEO Urban Angehrn.
“In this context, it is important that CS’s banking business continues to function smoothly and without interruption. That is now the case.”
The SNB policy rate change applies from Friday. Banks’ sight deposits held at the SNB will be remunerated at the SNB policy rate of 1.5% up to a certain threshold. Sight deposits above this threshold will be remunerated at an interest rate of 1.0%, and thus still at a discount of 0.5 percentage points relative to the SNB policy rate.