SNB Holds and Nordics Hike With Higher for Longer Now in Sight

Central banks from Switzerland to the Nordics delivered contrasting monetary moves with a converging message of higher-for-longer interest rates and limited appetite to keep tightening.

(Bloomberg) — Central banks from Switzerland to the Nordics delivered contrasting monetary moves with a converging message of higher-for-longer interest rates and limited appetite to keep tightening.

The Swiss National Bank surprised investors by avoiding a hike while refusing to rule out more action. Sweden’s Riksbank lifted borrowing costs and said that another step is possible, but far from certain. Its Norwegian neighbor also raised and hinted that only one more increase will be needed to quell inflation.

Both the Swiss and the Swedes signaled that they’ll keep selling foreign currencies, a policy that will further reduce balance sheets and could help contain imported price growth. 

The trio of central banks at the periphery of the euro region offered investors a prelude of action just hours before a suspenseful decision by Bank of England officials who are also weighing the tradeoff between persisting inflation pressures and languishing growth. 

While diverging in detail and immediate direction, the overarching theme in the announcements from all three countries, each of whose currencies features among the 10 most-traded in the world, is of a mature tightening phase that may not have much longer to run. 

That would chime with the neighboring euro zone, where European Central Bank President Christine Lagarde last week signaled that borrowing costs will be left to work through the economy for now after a close-run rate hike. She declined to exclude another move if needed.

Meanwhile in the US, Federal Reserve Chair Jerome Powell said on Wednesday that officials will now shift to “proceed carefully,” suggesting tightening is almost finished. His intention to keep rates “higher for longer” found eager echoes throughout Europe.   

“Monetary policy needs to be contractionary for a longer period of time,” Riksbank officials said in their statement, while Norges Bank Governor Ida Wolden Bache declared that “there will likely be a need to maintain a tight stance for some time ahead.”

Swiss National Bank President Thomas Jordan also offered a hawkish message that gave no hint of loosening anywhere on the horizon. 

“It takes a certain amount of time for increases in the SNB policy rate and the appreciation of the Swiss franc to fully transmit to economic activity and inflation,” he told reporters. “We will not hesitate to tighten our monetary policy further if necessary.” 

Investor focus will now turn to London, where BOE officials will decide whether to call a halt to a string of 14 consecutive rate increases. 

A surprise slowdown in inflation to an 18-month low on the eve of the decision fueled doubts among traders that policymakers will follow through on a hike that was previously expected with greater confidence in financial markets. 

Earlier this month, Governor Andrew Bailey hinted that tightening may not have further to run, as he said borrowing costs are probably “near the top of the cycle.”

For all European economies, cooling or even contracting economies are increasingly worrying policymakers. Lagarde last week told reporters that “the difficult times are now,” in a quarter when officials’ new forecasts show the euro zone is currently stagnating. 

Sweden’s challenges are a case in point. The Riksbank on Thursday predicted that the biggest Nordic economy now faces two years of contraction, shrinking 0.8% in 2023 followed by another drop in gross domestic product of 0.1%. 

Switzerland’s growth already stalled in the second quarter, and the SNB now predicts it will be “weak for the rest of the year.” In Norway meanwhile, expansion has also slowed, and officials are increasingly conscious that their actions are contributing to that. 

“Monetary policy is now having a tightening effect on the economy,” Norges Bank policymakers said. “The Committee does not want to raise the policy rate more than is necessary to tackle the high level of inflation.”

–With assistance from Kati Pohjanpalo and Niclas Rolander.

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