SNB leaves key interest rate unchanged thanks to easing inflationary pressure
Published: Thursday, Dec 14th 2023, 14:40
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The Swiss National Bank (SNB) has left its key interest rate unchanged for the second time in a row. Thanks to progress on the inflation front, it was able to afford to do so. However, it does not yet want to speculate about lowering interest rates.
The key interest rate remains at 1.75 percent, as the committee headed by President Thomas Jordan announced on Thursday at the quarterly monetary policy assessment. At the same time, the SNB is also stepping on the brakes in terms of communication. It no longer sees any immediate reason to publicly consider a further tightening of monetary policy or further interest rate hikes.
The main reason for this is the positive development on the inflation front. After skyrocketing in the wake of the pandemic and due to higher energy prices following the start of the Russian war of aggression, inflation has recently come back surprisingly quickly. At 1.4 percent in November, it was already clearly back within the SNB's target range of 0 to 2 percent.
Inflation down significantly
The SNB also stated that inflationary pressure had decreased slightly over the last quarter. However, uncertainty remains high, said Jordan, so that the inflation trend will continue to be monitored closely and monetary policy will be adjusted again should this become necessary.
From today's perspective, however, the SNB is confident that this will not be the case. It has also lowered its inflation forecasts for the next two years relatively significantly and expects average values of well below 2% for the two years - 1.9% in 2024 and 1.6% in the following year.
The monetary authorities have borne in mind that inflation is likely to rise again to 2% in the coming year due to higher electricity prices and rents and the increase in VAT.
No more foreign currency sales
One of the reasons for the positive inflation trend was the Swiss franc. With sales of foreign currencies, which the SNB had accumulated in recent years, imported inflation could be kept low. Now, somewhat surprisingly, the SNB has also adjusted its communication in this area. It intends to remain active on the foreign exchange market if necessary.
"However, we are no longer prioritizing currency sales," said Thomas Jordan at the media conference on the monetary policy decision. The recent significant nominal appreciation of the Swiss franc has made further interventions superfluous. However, the SNB does not have a specific currency target in mind.
However, Jordan left open the question of whether the SNB will cut interest rates in the coming year - as is likely to be the case with the US Federal Reserve or the European Central Bank (ECB), for example. In the current assessment, interest rate cuts were not under discussion, he simply said.
Opinions differ among analysts and economists in this regard. At UBS, for example, the first cut is expected next June, once the inflation risks have been averted and other central banks have made their first cuts.
By contrast, the specialists at VP Bank expect interest rates to remain unchanged for the entire coming year. The current interest rate level of 1.75 percent is low in absolute terms and is well in line with the current inflation rate and the expected increase in the coming months. Overall, however, the SNB can "remain relaxed". The SNB has not had to raise the key interest rate as significantly as the Fed or the ECB, for example, and there is no need to change sides immediately.
Weak growth in the coming year
The fact that inflation has recently moved back in the direction desired by the central banks is probably also due to the rather sluggish economy. And here the SNB is relatively pessimistic about growth in the coming year, especially compared to other forecasting institutes. It expects an increase in real gross domestic product (GDP) of just 0.5 to 1.0 percent, while most other professional observers expect figures of well over 1 percent in some cases.
According to the SNB, subdued demand from abroad and tighter financing conditions are likely to have a dampening effect on the Swiss economy in the coming quarters. However, the SNB also emphasized that the forecast for Switzerland is subject to considerable uncertainty. "The main risk is a more pronounced economic slowdown abroad," said Jordan.
(A video interview by AWP with SNB President Thomas Jordan can be found at the following link: https://youtu.be/q3wJnlsFPmk)
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