MNI INTERVIEW: SNB Should Not To Hike Too Much -Ex Staffer

The Swiss National Bank should be careful not to hike too much in this cycle, as inflation is being fed by supply constraints and the neutral rate of interest in the country likely remains lower than before the financial crisis, former SNB senior economist Daniel Kaufmann told MNI.

The SNB is widely expected to take the rate on sight deposits from -0.25% into positive territory for the first time in five years on Thursday, with another increase to match June’s 50bps, though speculation that it could hike by 75bps or more has intensified since the European Central Bank upped rates by that amount.

“I expect a significant interest rate hike,” Kaufmann, now a professor at the University of Neuchatel and Research Fellow at the KOF Swiss Economic Institute said in an interview. “Whether a substantial tightening is optimal is less clear, since inflationary factors still stem from supply side factors.

While headline inflation hit 3.5% in August, the highest since 1993, Kaufmann noted that the SNB’s trimmed mean core inflation rate stood at 1.5% in July, and that there was only weak evidence of a spike in wages. Leading indicators also point to a slowing of the Swiss economy, with little risk of overheating despite a tight labour market.

“The SNB had a quite optimistic view on the real economy and the labour market in June, so this may imply that they will continue to raise rates later in the year if this outlook is confirmed,” he said.

Consumer price inflation will remain high as regulated electricity tariffs rise with a delay, which the SNB is likely to see as further justification for tightening , despite its being due to supply-side factors, Kaufmann said.

NEUTRAL RATE

“I don’t think we have seen the end of the hiking cycle in September,” he added. “Tightening is warranted, but it is difficult to judge how much because it is difficult to separate demand side inflation from supply side inflation.”

Inflation has previously run at similar levels, as before the financial crisis when it touched 3.1%, without prompting a wage-price spiral, he said..

Rule-of-thumb economic calculations based on inflation expectations and real productivity growth might put the neutral rate of interest at somewhere between 1% and 3%, but Kaufmann said that this level is difficult to determine and changes over time, though it probably remains low in real terms, and has only risen slightly in nominal terms.

“Long-term inflation expectations remain around 1% in Switzerland, which supports that inflation expectations are still well anchored,” he said

“I am convinced, however, that the SNB does not have to tighten more than markets expect to defend its credibility. Indeed, a credible central bank has to tighten less to bring inflation down in the future than a central bank that lacks credibility.”

The Swiss franc has appreciated from about 1.03 to the euro at the end of last year to just about 0.96 now, though its depreciation in overall trade-weighted terms means the SNB has said it is no longer highly valued.

The currency’s short-term direction will depend on whether the SNB tightens more or less than what markets expect, Kaufmann said.