SNB likely to stand still again
Published: Monday, Dec 11th 2023, 13:30
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The Swiss National Bank (SNB) is unlikely to raise the key interest rate on Thursday. Nor will it have to, as inflation has recently cooled more than expected.
Economists almost unanimously expect the monetary authorities to leave the SNB key interest rate at 1.75% again at this meeting. In September, a majority had expected a further increase and were then surprised by the SNB. The central bank left the key interest rate unchanged for the first time since the start of its cycle of increases.
Prior to this, the central bank had raised the key interest rate from -0.75 percent in June 2022 to the current level in just five steps, putting an end to the years of negative interest rates in Switzerland.
Who lowers first?
While concerns about "higher for longer" key interest rates were still a burden in September, falling inflation data in the USA, Europe and also in Germany led to a rethink.
As a reminder, the SNB's stated aim is to ensure price stability. With inflation falling further in November to 1.4% from the previous 1.7%, the SNB is well on the way to fulfilling this mandate. Its stated goal is an inflation rate of between 0 and 2 percent.
Against this backdrop, investors are focusing on the question of 2024: who will cut first and by how much? This has been particularly evident on the bond markets, where yields have seen a significant decline.
"The lower-than-expected inflation in Switzerland in November has closed the door to a further interest rate hike," says Daniel Lüchinger from Graubündner Kantonalbank. At the same time, however, he does not see any rapid interest rate cuts, as on the one hand there are upside risks to the inflation outlook, particularly for rents. "Secondly, inflation in Switzerland has only been above one percent in five of the last 27 years, which indicates that inflation prefers to be kept in the lower half of the target range."
When will the reductions come?
As far as the SNB's future interest rate course is concerned, however, the opinions of economists differ surprisingly widely. The economists at Capital Economics are predicting the first interest rate cut for the next monetary policy assessment in March. They expect inflation to be around 1% in the coming year.
Other experts, such as those from UBS or AXA Investment Managers, expect the first interest rate move to come in June, if not September.
St. Galler Kantonalbank, on the other hand, believes that the SNB will not loosen the reins until 2025. The central bank currently has no reason to cut interest rates quickly, not least because the current key interest rate of 1.75% is anything but high and is holding back the economy.
A look at the inflation forecast
So while no changes are expected on the interest rate side on Thursday, it is quite possible that the SNB will adjust its inflation forecasts and also change the wording of its currency market interventions.
Recently, the SNB has repeatedly emphasized that it welcomes a strong franc in the fight against imported inflation - even helping it along with currency sales if necessary. Experts at both UBS and Capital Economics believe it is possible that this instrument could become less important.
Monetary policy fine-tuning has begun
Similar to the SNB, the US Federal Reserve (on Wednesday) and the ECB (on Thursday) are also likely to confirm the status quo this week and not make any further interest rate moves. "It is unlikely that the pre-Christmas monetary policy calm will be disturbed again," says a commentary by Allianz Global Investors.
In the context of recent price data in particular, the choice of words regarding the expected future interest rate path will be important. Both Fed Chairman Jerome Powell and ECB President Christine Lagarde should want to keep their backs free for a "higher for longer", the experts continue.
The central banks have reached the phase of fine-tuning monetary policy. "Those who are too quick to give the all-clear signal on the price front are not only fueling the fantasy of interest rate cuts, but also inflation expectations," the commentary continues.
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