By John Revill

ZURICH The Swiss National Bank raised its policy interest rate by 25 basis points on Thursday as the central bank pressed ahead with its campaign to dampen stubborn inflation and left the door open for more tightening.

Chairman Thomas Jordan pointed to rising inflationary pressures and the danger of price increases becoming entrenched.

Although inflation has declined compared with a year earlier, there was still more work to be done, Jordan told reporters.

"The marked decline in recent months is very welcome," Jordan said. "This is also the result of our monetary policy which is now significantly more restrictive than one year ago.

"Nevertheless the underlying inflationary pressure has risen further," He added. "We are therefore observing persisting second-round effects in many domestic goods and services."

As a result, Jordan said he could not rule out further increases.

On Thursday the SNB increased its policy rate and the rate it charges on sight deposits to 1.75% from the 1.5% level set in March.

The increase, in line with forecasts in a Reuters poll, meant Swiss interest rates were now at their highest level since October 2008.

Jordan acknowledged that higher interest rates were leading to higher rents, with the knock-on effect of adding to inflation.

Still, he said this would not deter the SNB from hiking again.

"Without a more restrictive monetary policy, there would be a danger of inflation becoming entrenched and much stronger rate increases would be needed in the future."

Even with the Thursday's rate increase, the SNB forecast Swiss inflation would remain above its 0-2% target by 2026.

In its first forecast for the period, the SNB said it expected inflation to be at 2.1% in the first quarter of 2026.

The central bank also raised its inflation forecasts for 2024 and 2025.

The SNB said it also remained ready to intervene in currency markets to maintain price stability, which it defines as an inflation rate of 0-2%.

In recent months the SNB has been selling foreign currencies to boost the value of the Swiss franc, whose strength has reduced the effect of more expensive imports.

In the last 12 months the SNB has switched focus from tackling the high value of the Swiss franc to combating price rises which it has said run the risk of becoming entrenched and harder to shift.

Although modest by international standards, at 2.2% in May, Swiss inflation has remained above the SNB's 0-2% target range since February 2022, with rent increases later this year also expected to add to price pressures.

(This story has been corrected to remove reference to April 2002 milestone comparison as the rates are highest since October 2008)

(Reporting by John Revill; Editing by Tomasz Janowski and Maria Sheahan)