By John Revill
ZURICH (Reuters) -The Swiss National Bank held out the prospect of further interest rate hikes later this year after it surprised markets on Thursday by pausing its current cycle of increases, sending the Swiss franc reeling.
The SNB held its policy interest rate unchanged at 1.75%, noting that inflation has ebbed lower in Switzerland, but said a further tightening cannot be ruled out.
The decision - described by analysts as a "hawkish pause"- marked the first time the central bank has not hiked rates since March 2022, and ran counter to forecasts in a Reuters poll which had predicted a 25 basis point increase.
The announcement came after Swiss inflation came in at 1.6% in August, within the SNB's target range of 0-2%, and sent the Swiss franc tumbling as much as 1% against the euro and the dollar - its biggest daily drop against the euro since the banking turmoil in March.
"The situation allows us to wait for now and review at the next monetary policy assessment whether the measures we have taken to date are sufficient to keep inflation within the price stability range on a sustainable basis," SNB Chairman Thomas Jordan told reporters.
Still, Jordan kept the prospect open of further hikes.
"The battle over inflation is not yet over," he said. "There is still an existing inflationary pressure, and we do not exactly know whether this inflationary pressure will increase again."
The SNB would follow the situation "very closely" over the next two months, and would decide again in December whether further tightening was necessary, he added.
In pausing, the SNB diverged from the European Central Bank, which raised its key interest rate to a record high of 4% last week, although the U.S. Federal Reserve kept its rates unchanged on Wednesday.
On a hectic day for central banks on Thursday, Sweden's Riksbank and Norway's central bank both raised rates by 25 basis points, while a close decision is expected at the Bank of England later in the day.
In Switzerland, five consecutive interest rate hikes totaling 250 basis points have helped drive inflation down from last year's peak of 3.5% and keep it within the central bank's 0%-2% target for the past three months.
"In all, the SNB is in a more comfortable position than other central banks but, as expected, did not claim victory in its inflation battle," said Nadia Gharbi, senior economist at Pictet Wealth Management. Still, barring a surprise inflation spike, the central bank was probably done with rate hikes, she said.
"We expect the central bank to keep its main policy rate unchanged for some time."
Although the SNB maintained its forecast for economic growth of around 1% this year, analysts said the SNB was also taking into account the slowdown in the Swiss economy, which stagnated in the second quarter.
"The Swiss economy is currently confronted with inflation and economic risks. By refraining from raising interest rates, the SNB has weighted economic concerns more heavily than inflation risks," said Alessandro Bee, senior economist at UBS.