The silence of the SNB sets up a new rate cut

(Bloomberg) — The Swiss National Bank’s decision this week is expected to be another crucial question as to whether officials will cut their interest rate or stay in limbo.

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The central bank’s announcement Thursday will come three weeks to the day after the last public comment from one of its policymakers. Amid market volatility and the franc’s gains since then, investors are wondering whether there is any prospect of further developments.

Economists are broadly divided on the outcome, with a small majority expecting Switzerland – whose March rate cut preceded any other of the world’s 10 most traded currency jurisdictions – will now also become the first in this group to interrupt its relaxation cycle. .

Inflation in Switzerland is low compared to its peers, but price growth has also stopped slowing in the latest figures, providing the SNB with justification for a reduction or maintenance.

Whatever policymakers decide, their silence is just one factor clouding investors’ outlook. Assessing monetary policy globally has become more difficult, and the first rate cuts in Canada and the Eurozone this month now contrast with the growing reluctance of the US Federal Reserve to act before the end of the year, if at all.

Suspense and surprise have been commonplace for the Swiss central bank led by President Thomas Jordan. Notable shocks under his leadership range from the abandonment of the franc cap in 2015, to a first half-point rate hike in 2022 and the quarter-point reduction to 1.5% during his last meeting three months ago.

For this week’s decision, traders’ bets on a SNB decline fell from around 97% in April to around 60%. Economists aren’t so sure, with 16 out of 28 respondents in a Bloomberg survey expecting no change. Here’s a look at the dilemma facing the SNB.

The arguments in favor of a reduction

Among the arguments in favor of a further reduction are the prospect of lower inflation in Switzerland and the current weakness of exports which weighs on growth.

Inflation is currently mainly driven by an increase in rents which will prove temporary, according to Gero Jung, chief economist at Mirabaud in Geneva.

“Switzerland is a small, open economy,” he said last week. “The global situation speaks in favor of a reduction. »

SNB officials could find possibilities for easing if necessary. On May 30, Jordan said it estimated Switzerland’s real neutral interest rate to be around zero. Given that its rate is currently 1.5% and inflation is 1.4%, this means there is some room to maneuver.

“Jordan said the current level of interest rates remains restrictive,” said Karsten Junius, chief economist at Bank J Safra Sarasin. “So I firmly believe we will see another reduction.”

The arguments for a break

Inflation remains consistently in the upper half of the central bank’s 0-2% target range and the economy has shown resilience so far. These are arguments for staying on hold.

Maeva Cousin of Bloomberg Economics points out that growth has maintained its momentum for three consecutive quarters, operating broadly at its potential. She also adds that the SNB would have to revise its inflation forecast upwards if the authorities decide to cut interest rates now.

“Policymakers may prefer to wait for some downside surprises from rising prices to materialize, so they can cut rates without raising inflation projections,” she said in a report.

The relatively low level of Swiss interest rates on a global scale limits the SNB’s room for reduction. This could be particularly relevant when it comes to the franc, which – according to some – has an even stronger impact on the economy than borrowing costs.

“It would make sense to retain some room for easing, in case a geopolitical event occurs and the franc appreciates again,” said David Marmet, chief Swiss economist at Zurich Cantonal Bank. If the SNB uses this possibility, it “should not become negative again,” he added.

The franc dilemma

Added to the uncertainty is the fact that the Swiss currency constitutes an additional headache. Last week, it gained the most since December against the euro after President Emmanuel Macron’s call for early elections in France prompted investors to buy the franc as a safe haven.

It is unclear how SNB officials will judge this decision. They have long resorted to interventions to keep the currency under control, although cutting rates is also an option if they want to weaken it. On the other hand, avoiding any easing could also limit imported inflation.

Strategists point to Jordan’s most recent speech, in which he said too weak a currency was the most likely source of higher inflation in Switzerland. According to Kamakshya Trivedi of Goldman Sachs, it is even possible that the central bank will reintroduce language into its statement indicating that it is prepared to sell currencies, a clause it abandoned last December.

Meanwhile, the euro-franc pair’s day-to-day volatility reached 18.27%, its highest level since March 2023 – when global banking concerns dominated market sentiment.

Whatever the outcome of Thursday’s meeting, arguably the contrast between cutting interest rates or not could be relatively insignificant. GianLuigi Mandruzzato, senior economist at EFG Bank, said last week that staying on hold with the signal of an easing or reduction trajectory, but suggesting a plateau ahead could yield similar results.

That choice “wouldn’t make much difference to the economy and markets,” he said.

–With help from Naomi Tajitsu and Vassilis Karamanis.

(Updates with volatile currency in the Franc Dilemma section)