MNI INTERVIEW: SNB Cut Or Hold Decision "50:50" - Wyplosz

The chances of the Swiss National Bank holding its policy rate at 1.5% or cutting by 25 basis points when it meets next week are about even, prominent Swiss-based economist Charles Wyplosz told MNI, with inflation on target but officials likely to be wary of the potential for European political turbulence to feed inflows and strengthen the franc.

Having lowered rates by 0.25 percentage point in March, and with inflation currently within the 0-2% target range at 1.4%, with the core measure at 1.2%, the SNB may feel the time is right to “cement progress and wait a while” before moving again, Wyplosz said in an interview.

Snap French elections and last week’s European Central Bank rate cut have already prompted some appreciation of the franc, which the SNB is likely to regard as likely to have a mildly contractionary effect at a time when the central bank sees Switzerland’s economy growing only “modestly” in the coming quarters.

Overall, the chances of a rate cut versus a hold this month are “50:50”, Wyplosz said, though he cautioned that the fact that rates are already so low gives the SNB less room for manoeuvre and makes its moves this year harder to anticipate.

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“The French political situation has instilled some financial instability, generating some safe-haven inflows. But this could reverse as markets become more sedate and, of course, the SNB might be intervening in the forex market - we don't know yet,” he said.

“Turmoil in the euro area would appreciate the franc and lower inflation. SNB's efforts at lowering the franc, an unspoken move to shrink the balance sheet, would work in the opposite direction.” (See MNI INTERVIEW: SNB FX Move Eyed If ECB Cut In June - Benigno)

When it does cut again the SNB is likely to move in 25bp increments, Wyplosz said, adding that, barring a marked domestic slowdown, Switzerland’s longer-run interest rate is likely to be at the SNB’s “sweet spot” of 1%, with inflation moving “slowly” towards that level.

Wyplosz was critical of outgoing SNB chair Thomas Jordan’s decision to go public with the bank’s estimate that r* - the natural or neutral rate of interest - is “around 0%” in a recent speech.

“Estimation of the natural rate is more art than science. I wouldn't throw a number around, and Thomas Jordan should not play this game,” he said.