The Swiss National Bank opted for a smaller rate hike at its quarterly monetary policy meeting Thursday, but said further rises may be needed to bring inflation to target.
The SNB announced a 25 basis point hike, taking its policy rate to 1.75%, in line with expectations in a Reuters poll of economists.
It is the fifth consecutive hike since it began pulling rates out of negative territory in June 2022, though it had previously enacted 50- or 75-basis-point rises.
Inflation in Switzerland eased to 2.2% in May from 2.6% in April, putting it well below its neighbors in the euro zone, where inflation averages 6.1%.
However, the SNB said in a statement that it was "countering inflationary pressure, which has increased again over the medium term." It targets inflation of less than 2%.
"It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term," the central bank said, adding that it would take action in the foreign exchange market as necessary and focus on selling foreign currency to ensure monetary stability.
Though the SNB early last year sought to dampen the rise of the Swiss franc as it gained amid market volatility, it is now targeting foreign currency sales to boost its value in an effort to bring down the cost of imports.
The SNB expects inflation to fall to 1.7% in the third quarter before rising to 2% in the fourth, and gradually creeping a few percentage points higher in 2024 due to second-round effects and some domestic inflationary pressures such as rent prices.
"This upward revision of forecasts is a particularly hawkish signal and suggests that the SNB will raise rates again," economists at Dutch bank ING said in a note.
"At a time when other central banks seem to have lost confidence in their models and are looking primarily at the actual rate of inflation, the SNB seems to be taking a different approach by focusing primarily on inflation forecasts," they said.
"After September, the SNB rate is likely to remain at 2%, with a rate cut looking unlikely between now and 2026."
The SNB has been in the spotlight in recent months for its role in facilitating the emergency takeover of Credit Suisse by UBS.