MNI INTERVIEW: SNB FX Move Eyed If ECB Cut In June - Benigno

The Swiss National Bank may further utilise its balance sheet if rate cuts fail to provide sufficient Swiss franc depreciation to offset the disinflationary effects on the domestic economy of a weaker euro, former Federal Reserve staffer, Gianluca Benigno told MNI.

With the European Central Bank signalling it intends to ease in June, despite the recent repricing of Federal Reserve cuts, SNB policymakers wary of real rate appreciation may be considering a return to foreign currency intervention, Benigno said in an interview.

Tumbling inflation meant the SNB ended its “focus” on selling foreign currency to fight imported price pressures last December, he said, though the bank has said it remains willing to act in the foreign exchange market “as necessary.”

“Of course they are thinking more about the euro than other bilateral currencies. The peak was reached in Q4 2023, after which there has been a clear trend against the euro and the US dollar," the University of Lausanne economics professor told MNI.

TENSIONS

“After the [March] policy decision there was a little bit of depreciation but as the ECB has signalled a June rate cut we have also had a retracement. That's where I see a little bit of tension, and that’s why there might be a possibility that they restart FX intervention,” Benigno continued.

Marginally more “bullish” recent euro area data could raise hopes of a positive surprise, but growth is “clearly” a concern, he added, with Germany’s sluggish economy in particular contributing to the subdued outlook for Swiss output.

Faced with this - and keen to avoid a return to pre-Covid deflationary pressure - the SNB could well cut again, said Benigno, also a fomer Senior Economist and Head of International Research at Federal Reserve Bank of New York.

“In terms of anticipating that, a downwards move in interest rates would help in balancing the exchange rate.”

RENT COSTS

One factor that could delay a return to inflation levels much closer to the SNB target’s lower bound is the slow passthrough of past reference rate increases to rental cost increases, he noted, with the process perhaps nearing completion by the end of the year, although with any inflationary effect dissipating mechanically as rents once again fall in line with the lower policy rate.

Benigno praised the SNB for acknowledging the contribution of domestic and commercial rents, including their impact on corporate refinancing costs, to domestic inflation dynamics. He was “surprised” at the relative lack of recognition the rental channel receives elsewhere, “especially if one compares what the SNB does, the way they spell it out, and the openness with which they do so, with other central banks.” (see MNI INTERVIEW: Rising Rents Shouldn't Defer BOE Rate Cuts)

Rather than viewing the Swiss central bank as habitually following in the footsteps of the ECB, the decision to cut rates before most developed market central banks should tell markets that SNB policymakers “have their own way of thinking, and also that they are able to anticipate, or at least look forward to what might happen, in a way which is rather more independent.”

With conditional forecasts putting average annual inflation at 1.4% for 2024, 1.2% for 2025 and 1.1% for 2026, against a target of 0-2%, March’s monetary policy assessment saw the policy rate cut by 25bps, sending the CHF lower against the US dollar and the euro. (See MNI SNB WATCH: SNB Cuts By 25Bp To 1.5%)