MNI SNB WATCH: 50BP As Inflation Fears Override CS Collapse

The Swiss National Bank raised its interest rate on sight deposits by 50bps to 1.5% on Thursday in response to “renewed” inflationary pressures, and said it had stepped in to support a takeover over of Credit Suisse earlier this week to stem a loss of confidence in the bank that threatened to turn into a major financial crisis. (see MNI SNB Preview - March 2023: Bank Liquidity Provision Should Clear Path for More Hikes)

Headline inflation of 3.4% in February“ was clearly” above the 0-2% range the bank equates with price stability, SNB chairman Thomas Jordan said in a press conference, with the latest conditional forecast putting average annual inflation at 2.6% for 2023 and 2.0% for 2024 and 2025.

The SNB remains willing to be active in the foreign exchange market “as necessary,” he said, noting also that “for some quarters now, the focus has been on selling foreign currency.”

The decision by the SNB, banking regulator FINMA and the Swiss government to facilitate the sale of Credit Suisse to UBS was taken to prevent a banking crisis, the consequences of which could have been “extreme,” Jordan said, adding that a deal was expected to go through within the next two weeks. (see MNI INTERVIEW: Swiss Should Explain Why Emergency Plan Ignored).

GUARANTEES

The SNB has so far provided liquidity guarantees of up to CHF 200 billion to support the takeover, and is ready to provide unlimited liquidity against the collateral. The central bank would not say how much has so far been accessed, but there is, Jordan said, “no doubt” that as much would be used as needed to ensure an agreement is reached.

The creation of a new merged bank will undoubtedly lead to competition issues that will need to be addressed by regulators in the medium- to long-term, Jordan said. But he argued that it was necessary to rush through a takeover, rather than enter a resolution process, due to the fragile nature of the situation, and the risk of triggering a crisis.

“UBS will be a very big bank and competition issues will be relevant,” Jordan said, noting that the deal “creates a new situation for the supervisory authority.”

“But at this moment the focus has to be on maintaining financial stability and that the closing of the deal will be smooth and fast.”

Jordan declined to comment on the decision to bail in Credit Swiss’s AT1 bondholders - a move the ECB later said it would not repeat in similar circumstances - instead referring the issue to supervisory authority FINMA. The market turmoil surrounding Credit Suisse had not been a factor in the SNB’s decision to cap its rate rise to half a point, he said.

Last month’s rise in inflation was due principally to higher prices for electricity, tourism services and food, Jordan said, although price increases are now broad-based. GDP growth for 2023 is expected to be 1%, up half a point from December’s forecast of 0.5%.

Lending to homebuyers has remained largely stable in recent months, Jordan said, though there are signs of a slowdown in residential real estate prices.