- The Swiss National Bank (SNB) raised interest rates by 75 basis points at its monetary policy meeting in September, bringing its key interest rate to +0.50%.
- Overall, the announcement’s forward guidance was not as dovish compared to comments from many other global central banks. Instead of announcing vigorous interest rate hikes, the SNB instead reiterated that it cannot be ruled out that further hikes in the SNB key interest rate will be necessary to ensure price stability over the medium term. In addition, the central bank showed itself willing to intervene in the foreign exchange market if necessary.
- Looking ahead, we believe the SNB will continue to tighten monetary policy but raise interest rates on a smaller scale, consistent with our forecast for slower growth and slightly more contained inflation next year. More specifically, we expect the SNB to hike rates by 50 basis points in December and 25 basis points in March, with a final policy rate of 1.25%.
Swiss National Bank ends negative interest rates
The Swiss National Bank (SNB) raised interest rates by 75 basis points at its monetary policy meeting in September, bringing its key interest rate to +0.50%. Switzerland was the last European country to move interest rates into positive territory.
Overall, the announcement’s forward guidance was not as dovish compared to comments from many other global central banks. Instead of signaling vigorous interest rate hikes like other institutions, the SNB instead reiterated that it cannot rule out further hikes in the SNB key interest rate in order to ensure price stability over the medium term. Additionally, the central bank continues to monitor the franc exchange rate closely, as currency strength has been a factor that has helped dampen inflationary pressures. After hitting a seven-year high against the euro this week, the franc fell around 2% against the euro following the announcement as interest rate action fell 75 basis points short of the hike priced in by interest rate markets. The SNB confirmed its willingness to intervene in the foreign exchange market if necessary.
Along with its monetary policy decision, the SNB also published updated economic forecasts. It has revised its overall CPI forecast upwards and now expects average inflation to be 3% in 2022, 2.4% in 2023 and 1.7% in 2024, depending on its current policy rate of 0.50%. As for growth, the SNB lowered its forecast to 2% GDP growth this year, half a percentage point below its June forecast, citing slower global headline growth and energy shortages in Europe.
Where to from here?
Looking ahead, we believe the SNB will continue to tighten monetary policy but raise interest rates on a smaller scale, consistent with our forecast for slower growth and slightly more contained inflation next year. More specifically, we expect the SNB to hike rates by another 50 basis points in December, bringing its policy rate to 1.00% by the end of 2022. Then in 2023 we expect a 25 basis point rate hike in March with a final interest rate of 1.25%. Furthermore, we do not expect unscheduled rate hikes between meetings as President Jordan has indicated that the SNB would only tighten unscheduled if the economic outlook changed significantly.
On the growth front, we see an accumulation of downside risks. While GDP growth was stable in the second quarter, warning signs of slower growth in the coming quarters are flashing as sentiment deteriorates and the Eurozone slides into recession. Q2 GDP grew by 0.3% qoq, buoyed by the reopening of the service sector and private consumption, which has been resilient despite higher prices (real household consumption increased by 1.4% qoq). However, some weakness was observed in the manufacturing sector, also reflected in the fact that the purchasing managers’ index for the manufacturing sector fell for the fifth straight month in August.
In addition, the KOF benchmark index, which has historically been a good indicator of GDP growth, fell for the fourth straight month in August, falling to 86.5. This downtrend indicates slower or negative growth going forward. Furthermore, our expectation of a eurozone recession by the end of 2022 poses additional downside risks to Switzerland’s growth prospects given the two regions have significant trade ties – 36% of Swiss exports go to the eurozone, while 45% of Swiss imports come from the eurozone . The economic prospects are made even more difficult by the Russia-Ukraine war and the resulting energy crisis, since Switzerland ultimately gets almost half of its natural gas from Russia. While Switzerland has relatively low gas requirements, accounting for only around 15% of total energy consumption, the country currently does not have large capacities to store natural gas or own gas reserves, making growth prospects even more uncertain. Against this backdrop, we do not forecast an outright recession in Switzerland, but do expect economic growth to slow in 2023, consistent with a slower pace of SNB interest rate hikes.
Also in line with our expectation of a slower pace of rate hikes is our outlook for more dovish inflation in 2023. Inflation in Switzerland is at a 30-year high and is above the SNB’s 2% target, but remains relative to others major European countries much lower economies. In August, the CPI accelerated to 3.5% yoy. Digging into the details, prices for housing, water, electricity, gas and other fuels were up just 4.7% yoy, well below the 19.7% increase in the eurozone. With the updated SNB forecasts showing annual average inflation of 2.4% for 2023 and 1.7% for 2024, we believe the central bank will continue to tighten monetary policy, although larger rate hikes are unlikely to be necessary as inflation is expected to increase will be closer to target by the end of 2023. The central bank noted that without the 75 basis point rate hike in September, its inflation forecast would be significantly higher.
While our base case calls for modest rate hikes in the coming quarters, we would not completely rule out a 75 basis point rate hike in December. With the SNB only holding one monetary policy meeting per quarter, half as many as the ECB, the central bank could opt for a larger rate hike to reflect this. The central bank has also repeatedly stressed its commitment to support the franc to cushion the blow from higher import prices and inflationary pressures. While his willingness to intervene in FX markets is a key policy lever, big rate hikes that support the currency could also complement these actions.