MNI INTERVIEW: SNB June Hold, But Sept Cut Possible - Lein

The Swiss National Bank is set to hold its policy rate at 1.5% in June even as recent franc appreciation puts downward pressure on prices, leading Swiss economist Sarah Lein told MNI, though it is likely to cut rates by 25 basis points in September if inflation comes in lower than its projected 1.5%.

Core inflation of around 1%, plus downward pressure on import prices since May, suggest the SNB can expect inflation to stabilise close to its likely target of 1% "in 2025/26" without further raising or lowering interest rates, Lein said in an interview. (See MNI INTERVIEW: SNB Cut Or Hold Decision "50:50" - Wyplosz)

“Since the inflation forecast is conditional on keeping a 1.5% interest rate, this suggests that the SNB sees its current stance as close to or at the neutral rate,” Lein said. “As long as most recent inflation numbers do not deviate from this forecast, or as long as there are no large changes in the projections of real economic activity, I see no reason for them to change their policy stance if they perceive 1% inflation in the medium run as a good target, which I think they do.”

However, with policy still “slightly restrictive”, any fall in inflation below the current forecast for a slight rise to 1.5% in Q32024, could prompt some tightening.

“Then I would expect the SNB to cut in September by 25bp,” she said.

NEUTRAL RATE

While Switzerland's real neutral rate has increased in the past years, in the absence of new shocks that raise inflation, it will continue to be low, she said, adding that the policy rate is likely to end the year at between 1.00-1.25%.

“It is difficult to estimate, but given that only 1.75% interest rates brought down inflation quite substantially, the equilibrium real rate seems to be low. I think an equilibrium real rate in the range of -0.5-+0.5 is consistent with recent effects of monetary policy on inflation. I guess [SNB President Thomas Jordan’s] statement of “around 0%” would include this range when taking into account estimation uncertainty.”

Moderate upside risks to the slow decline of inflation include stickier-than-expected services prices, in particular rents, which will most likely continue to rise, albeit at a slower pace, Lein said, with oil prices presenting a more serious threat. Geopolitical risks could affect inflation in both directions, while it is also possible neutral rates are lower than estimated.

The extent of Swiss foreign exchange intervention in the coming months will depend to a considerable extent on policy decisions taken in Washington and Frankfurt, Lein said, though the SNB will want to balance preventing too much franc appreciation against adding to its already massive balance sheet.

“If the ECB or Fed decisions were to lead to an undesired movement of the CHF/foreign currency exchange rate from the viewpoint of the SNB, the SNB will incorporate that into their decisions as well,” she said. “But since the interest rates in the U.S. or the euro area are probably further away from their neutral levels, the changes they could potentially make are clearly larger than in the case of the SNB, and therefore the impact on exchange rate movements from foreign monetary policy are expected to be larger.”