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

The Swiss National Bank could conclude its hiking cycle this week, with a 25bps hike to 1.75% the most likely outcome, a prominent former staffer told MNI.

Inflation is nearing the 0-2% target range and any urge for stronger tightening will be tempered by the fact that rents, which make up 20% of the consumer price index, are closely linked to the mortgage reference rate, said Sarah Lein, a former senior economist at the SNB whom observers suggest may be among candidates to replace outgoing Governing Board member Andrea Maechler.

“They still have to raise a bit to really bring inflation back down, but I could imagine if inflation continues to decline, going back more towards 1%, that with this 25 basis points we are at the terminal rate,” Lein, now professor of macroeconomics at the University of Basel, said in an interview.

“Even though domestic inflation is still a bit too high, I think they will be more careful actually adjusting rates, taking into account that this rent price channel could become quite important in the medium run. But they will still sound pretty hawkish.”

LITTLE RISK OF OVERTIGHTENING

Risks of overtightening aren’t “too big,” Lien said, but given the downward trajectory of headline inflation they cannot be entirely discounted. (See MNI WATCH: SNB Likely To Hike 25bp, But 50bps Not Ruled Out).

“I wouldn’t expect to see huge gaps between headline and core, but the SNB always looks more at headline inflation. This is the inflation that consumers feel and that strongly impacts their inflation expectations,” she said.

With imported inflation currently lower than domestic inflation, the SNB may also be more “careful” in its communication on foreign exchange interventions, Lein said, possibly removing references to selling foreign currency from the latest policy decision while reiterating that it remains willing to act as necessary.

Looking ahead, the SNB could use September’s monetary policy assessment to announce its intention to hold rates there for some time, while also signalling its willingness to re-start increases should inflation pick up.

“I could imagine that they would prefer to go straight to the terminal rate and then stay there. If they stopped raising rates before September, then they might actually include in their September communication that they might increase interest rates further if needed,” she said.

But the SNB is unlikely to make any other big calls - such as whether to adjust the levels at which banks’ excess reserves held at the central bank are remunerated - until Maechler's successor has been found.

“They may also be cautious on the backdrop of the UBS/Credit Suisse deal. They don’t want to do anything to harm banks’ net interest profits, but they certainly won’t communicate that,” Lein said.