MNI INTERVIEW: December Hike May Be SNB's Last - Ex-Staffer

The Swiss National Bank is likely to end its hiking cycle on Thursday, increasing rates by 50 basis points or by as little as 25, and will not follow up with further tightening in the absence of another inflationary shock, one of its former advisers told MNI.

While market expectations focus on a 50-basis-point hike this week, taking the benchmark rate to 1%, with another 50 points or so coming soon after, inflation, which has fallen to 3% after hitting 3.5% in August, is “very close to being under control”, said Yvan Lengwiler, noting that the SNB’s September conditional forecasts showed prices increasing by 2% three years from now, just about within the central bank’s price stability range.

“It's not obvious that there is a need to raise the interest rate right now," said Lengwiler, who worked first as an economist at the SNB between 1994 and 2000, before serving as Economic Adviser in the Monetary Research Division until 2001. “I expect the SNB to raise interest rates once more. Maybe just 25 basis points, or maybe they will do 50 basis points,"

The SNB, which hiked by 50 points in June and exited negative territory with another 75 in September, should now “let the medicine work”, he said.

Barring future shocks, the SNB need not set its policy rate above 1%, and could instead pursue a policy of boosting the value of the Swiss franc, said Lengwiler, now professor of economics at the University of Basel and a founding member of the SNB Observatory.

FX INTERVENTION

“The SNB could easily fine tune monetary policy with interventions on the foreign exchange market as they have done for more than 10 years,” he said. “They might do it in the opposite way now, to make the Swiss franc stronger to tighten monetary policy. That is certainly a possibility, and I think that would be a smart policy” (see MNI INTERVIEW: Ex ECB's Gerlach Sees Possible Rates/QT Tradeoff).

In contrast to the euro area, inflation is not feeding meaningfully into wages, with few upside risks to the outlook. In September the SNB forecast average annual inflation at 3% for 2022, before it eases to 2.4% in 2023 and 1.7% the following year, and then bounces back to 2% in 2025. (see SNB Watch: 50bps Hike As Inflation Eases, Rate Peak Nears).

While it is making progress on its inflation objectives, the SNB is likely to face further falls in its income, after having lost USD43 billion in the first nine months of 2022, with 38% attributable to its equity portfolio. This raises doubts as to how much in profits the bank will be able to transfer to the Swiss Treasury and cantons, Lengwiler said.

“We will see what the result will be at the end of the year, because they have a substantial equity portfolio as well. If interest rates rise further abroad, which is to be expected, they will make more losses.”