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Barclays: If Rate Hikes Not Enough to Generate CHF Strength, Expects Reserve Selling

SNB
  • The SNB hiked 50bp at the June meeting, and vowed to “take more action if needed to tackle inflation”. Equally important, the bank is now of the view that the franc is no longer highly valued.
  • The hawkish move was motivated by the fact that the current strength of CHF is not enough to stop Switzerland from importing inflation in our view. Latest Swiss inflation is near 3%, a historical and unacceptable high for the SNB, given its strict ceiling of 2%.
  • A significant part of headline inflation is driven by imported inflation. As such, the SNB’s only policy tool to curb inflation is to let the CHF appreciate. Rate normalisation is one way, and FX intervention (to buy CHF rather than sell) is another.
  • We expect more hawkish policies to come. Markets are pricing a terminal rate of just under 2% in two years. We expect the SNB to front-load hikes, continue with a 50bp hike per meeting this year, with a 25bp hike per meeting next year, to reach a terminal rate at 1.75% by end-23.
  • Our decision comes as the bank sees inflation still above target in 2025, is concerned about financial stability, and has no major growth concerns.
  • We also think the SNB will sell CHF if the franc does not strengthen sufficiently. At a minimum, the SNB will be buying less (the bank currently has a c.75%/25% split of its reserves in bonds/equities, with EUR and USD assets taking up 40% each, and the rest in Japanese, UK and Canadian assets).
  • At the moment, there is no urgency to sell assets given there is still sizable room to raise rates. But if rate hikes alone do not generate enough CHF appreciation, then we expect the SNB to start selling reserves.
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