Uncertainties about the next decision by the SNB

Economists are divided on the position that the Swiss National Bank (SNB) will take on interest rates next Thursday. In an environment of high inflation and monetary tightening, the institution needs to place its pawns wisely.

Since the last monetary policy decision on March 24, the Swiss guarantor of monetary stability has been in a difficult situation. The war in Ukraine, which has now been going on for over a hundred days, shows no signs of abating and inflation continues to rise, fueled by rising commodity prices and international logistics bottlenecks.

In this worrying context, the Organization for Economic Co-operation and Development (OECD) lowered its growth forecasts while raising its inflation expectations on Wednesday. It lowered its global growth forecast for this year to 3% from 4.5% last December. Inflation could rise to 8.5%.

Switzerland was not spared from these upheavals. The OECD expects gross domestic product (GDP) to increase by 2.5% in 2022 compared to +3.0% in previous estimates. Inflation is expected to be 2.5% for the current financial year, above the stability target limited by the SNB to 2%, and 1.8% for 2023.

According to experts, the direction that will be taken by the Swiss issuing institute next Thursday is not particularly obvious. For Vontobel’s chief economist, Reto Cueni, “the beginning of the monetary tightening cycle in Europe should finally wake up the Swiss National Bank”.

Indeed, on Thursday, the European Central Bank (ECB) confirmed the end of net debt buybacks in the market from July 1st. The federal funds rate is currently being held at historic lows, despite inflation in May of 8.1% over a year, a record high. However, the ECB plans to hike rates by 25 basis points at its next meeting on July 21 and expects another hike in September.

In the United States, the US Federal Reserve (Fed) has pledged to do everything it can to bring inflation back on track. It started raising interest rates sharply in May – by half a point in a range of 0.75% and 1% – and should continue to do so.

The SNB should wait and see, believes Mr. Cueni in a comment. The issuing institute, led by Thomas Jordan, is expected to make a first rate hike – at -0.75% since January 2015 – in September, followed by two more in December and March 2023, which will see the SNB take interest rates negative.

By tightening monetary policy, central banks are raising the cost of borrowing in hopes of curbing consumption and inflation. But raising interest rates too much, after two years of the pandemic, could also hurt the economic recovery, which depends in part on access to credit.

pressure on the franc

According to specialists at Commerzbank, the SNB has prepared the market for an exit from its ultra-accommodative monetary policy, but has also signaled that it is “not as hasty as its peers”. More than 60 central banks around the world have already hiked rates in 2022, Mirabaud Banque’s John Plassard recalled on Twitter.

The pressure is not too great for the Swiss central bank and they want to avoid upward pressure on the franc, which could be harmful for Swiss exporters. The SNB should therefore give priority to the ECB in July before following in September.

Daniel Kalt, chief economist at UBS, agrees. He does not expect the SNB to take a step before September. “An announcement next week (…) would be a surprise and could increase appreciation pressure on the franc given the unstable macroeconomic and geopolitical situation,” he told AWP.

According to Mr. Kalt, the SNB may still revise its vocabulary for valuing the franc to prepare the markets for its next decisions.

J. Safra Sarrasin’s specialists are more cautious. “It is wrong to assume that the SNB will only hike rates after the ECB,” they nuanced. The economy is doing well, the real exchange rate is not overvalued, inflation is above target and labor market tensions could push up wages.

For the bank, there is therefore “no reason for the SNB to wait any longer”. It could therefore hike rates by 25 basis points at its next quarterly meetings starting next week.


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