SNB Won’t Let Slowing Inflation Stop a Rate Hike: Decision Guide

Swiss National Bank officials won’t be deterred by signs of weakening consumer-price pressures as they probably keep up monetary tightening at their decision on Thursday.

(Bloomberg) — Swiss National Bank officials won’t be deterred by signs of weakening consumer-price pressures as they probably keep up monetary tightening at their decision on Thursday. 

An interest-rate hike from the current level of 1.5% of at least a quarter-point is widely anticipated by economists, even though inflation is now almost down to their 2% ceiling — and never reached the heights seen elsewhere. A bigger half-point step has been partially priced in by investors.

The SNB’s practice of holding quarterly meetings means that its tightening has lagged that of major counterparts in the euro zone and the US, where central-bank decisions take place twice as often. 

Swiss officials led by Thomas Jordan have increased borrowing costs by only 225 basis points since last June, compared to 400 basis points by the European Central Bank and 500 basis points by the Federal Reserve. 

While the impetus to catch up with peers is one motivation to act aggressively again, officials also insist that Switzerland isn’t out of danger, even though inflation has slowed to 2.2%. An underlying measure that strips out volatile elements such as energy has dropped even further, to 1.9%.

“Jordan has said quite clearly: inflationary pressure is still there,” said Alessandro Bee, an economist at UBS Group AG who predicts a quarter-point increase. “I would be very surprised if they don’t leave the door open for another rate hike and more foreign-exchange selling.”

Bee reckons a bigger half-point move — one that would out-pace recent action by the ECB — might confuse investors, given Switzerland’s more benign inflation backdrop. 

“What I could rather imagine is a 25 basis-point step now but intensifying foreign-exchange sales — to make monetary policy sufficiently restrictive and counteract risks of price pressures spreading,” he said. 

Other observers aren’t so sure. Credit Suisse is among banks anticipating a half-point increase, as is St Galler Kantonalbank. Patrick Haefeli, an economist there, reckons Swiss policymakers will want to do more now before the global tightening cycle turns. 

“The SNB will opt for a somewhat larger step now to compensate in advance,” he said. “We believe that the window of opportunity for hikes will close in July or August, because the ECB and the Fed will then be at the end of their tightening cycles.”

Other things to keep an eye on:

  • Investors will watch for any comments on SNB sales of foreign currencies, a task that would be carried out by the department led by Andrea Maechler. She’s about to depart and the government has yet to name a successor.
  • The SNB publishes its annual Financial Stability Review earlier on Thursday. The collapse of Credit Suisse Group AG in March and its subsequent government-brokered takeover by UBS Group AG is likely to draw attention.
  • Switzerland’s property market may also feature in the report.
  • Any remarks on rents will also draw attention:
    • Some economists have warned that a recent increase of the reference interest rate for rents — triggered by SNB’s rate moves — is set to cause widespread rent hikes. That might account for half of Swiss inflation next year, according to estimates.

–With assistance from Constantine Courcoulas.

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