SNB: wait in June and then hit hard in September?

Awaiting the announcement of the National Bank of Switzerland on Thursday, economists differ on the rate of increase.


From left to right Fritz Zurbrugg, Thomas Jordan and Andrea Michaela Mehler

For seven years, the ritual seemed almost unchanged. At each of its presentations, the Swiss National Bank (SNB) confirmed, with some nuances, that the Swiss franc was highly overvalued, justifying keeping its control rate at -0.75%. Given the acceleration of Swiss inflation, well above the target range of 0 to 2%, and the much more aggressive tone adopted by the European Central Bank (ECB) recently on the future tightening of its monetary policy, the decision released by the SNB Thursday will receive much more attention than usual .

So far, most economists agree that the growth of the Swiss economy remains stable, while the sharp rise in inflation, although now well above 2%, should remain a temporary phenomenon in Switzerland. According to GianLuigi Mandruzzato, senior economist at EFG Bank, “the Swiss economy has so far shown resilience, despite the headwinds that characterize the global economy, under moderate inflationary pressures.” He notes that Switzerland has so far withstood the numerous upheavals that have hit the world economy.

Inflation is expected to fall to 1% in 2023

In terms of inflation, the consumer price index (CPI) rose by 2.9% on an annual basis in May, which was not observed after the global financial crisis. However, according to the economist, much of the overall inflation is the result of rising prices for imported goods, from energy to food through car prices. Without these factors, price growth is much more modest: “Excluding food and energy, core inflation remains comfortably below the 2% threshold, and the same applies to domestic prices, which are most sensitive to the decisions of the Swiss National Bank (SNB). In March, the SNB predicted that inflation would rise temporarily in 2022 and then return to about 1% in 2023 and 2024, “said Gian Luigi Mandruzzato. Moreover, the franc, which is still highly valued, limits the risk of inflation.

Preparing markets for further action

“Surprisingly, in this context, the exchange rate of the Swiss franc has weakened, despite its safe currency status. This probably reflects market expectations that the SNB will raise rates later and less than other central banks, including the ECB. Such a trend would be reminiscent of what happened in past periods of high inflation, fueled by commodity prices, in the late 1970s and just before the 2008 global financial crisis, ”said GianLuigi Mandruzzato. So what does he expect at the SNB meeting on June 16? “In general, the SNB is likely to leave interest rates unchanged on Thursday and may signal a tightening of policy later this year,” he predicts.

Hero Jung, chief economist at Mirabaud Asset Management, also doubts that SNB will announce the first screw turn on Thursday. “It is unlikely that SNB will announce a rate hike this week,” he said. There are two main reasons for this: on the one hand, the franc remains – in the eyes of the SNB – highly valued, which limits inflationary pressures in Switzerland. On the other hand, there is no immediate risk of falling prices in Switzerland, even if inflation is expected to exceed 2% by the end of 2022, says Hero Jung. “In its tentative inflation forecast last March, the SNB expected inflation to fall to 0.9% in 2023 and then remain at that level in 2024,” he said.

The ECB’s very “hawkish” attitude has already been assessed.

If the ECB raises rates in the summer, will the SNB be forced to follow or even anticipate this movement? Hero Jung believes that with regard to the ECB, the markets are already integrating an aggressive policy of raising rates by the end of the year. “Currently, the markets are raising the ECB rate by 170 basis points by the end of this year. This would correspond to a multiple increase in rates, including an increase of 50 basis points, “he said. “The very hawkish attitude of the ECB has already been assessed,” he said. However, according to the economist, he is not at all sure that the ECB will increase rates so much by the end of this year. “I think the ECB will be less than the markets expect. In Europe, unlike in the United States, wage growth remains much more modest, and the ECB is reluctant to repeat the same mistake it made shortly before the European debt crisis when it raised its rates in 2011. The BCE has everything, but it wants to be accused of destroying the ongoing economic recovery, ”said Hero Jung.

To precede the ECB, not to follow it?

To end the negative interest rate regime, which has been in effect since 2015, the Swiss National Bank (SNB) needs to raise the rate by 0.75%. He could do so by raising rates three times by 0.25% at his next three meetings in June, September and December. However, SNB could also wait first and then raise the rate by 50 basis points in September. This is exactly the scenario envisaged by UBS, which estimated earlier this week that SNB may change in June, but will raise key rates by 0.5% in September and then by 0.25% in December.

Doing nothing in June and then acting decisively in September is also a scenario predicted by Stefan Gerlach, chief economist at EFG Bank. “The SNB may prefer to wait before taking action and then raise the rate by 50 basis points later this year,” he said. However, maintaining the status quo on Thursday risks putting the SNB in ​​a delicate situation later this year: “If the SNB does nothing now, it could be under pressure to act when the ECB announces the first rate hike.” he said.

The best “front-wheel drive” is expected.

As for Credit Suisse, Claude Morer, Switzerland’s chief economist, does not expect a surprise on Thursday. On the other hand, he hopes that the SNB will provide clear “best practices” on how things will develop in the coming months, “said the economist during the presentation of” Monitor Suisse “for the second quarter of 2022. According to him. , it is time for the National Security Council to announce the way to normalize its monetary policy.

With regard to the development of inflation in the coming months, Credit Suisse also believes that the acceleration in prices observed in recent months will remain a temporary phenomenon, at least for Switzerland. After average inflation in Switzerland is expected to reach 2.3% this year, it will fall to 1% in 2023, the bank said in its forecast on Tuesday. Estimates of gross domestic product (GDP) growth remain unchanged at 2.5% in 2022 and then 1.6% in 2023. Growth will be supported, in particular, by private consumption, which will grow by 4% this year and then by 1.6% next year. Opportunity for Credit Suisse economists to also consider the impact of rising consumer prices in the future: since 1982, rising inflation by 1% has led to an average reduction in consumption of 0.11-0.13%, the bank calculated. In general, Claude Morer does not expect a recession, but a slowdown in growth.

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