MNI INTERVIEW: SNB Could Be Forced Into Intra-Meeting Hike

The Swiss National Bank could be forced to announce a 25 or 50bp interest rate hike before its next scheduled meeting as major central banks continue to tighten their monetary policy, a former SNB economist told MNI in an interview, though she saw it as unlikely that the policy rate would rise much beyond 1.5%.

The SNB will try to avoid another monetary policy decision before its next planned announcement, said Sarah Lein, senior economist at the SNB from 2008-14 and now professor of macroeconomics at the University of Basel. But, while Chairman Thomas Jordan could use communication to signal a higher or lower rate path and smooth out the period between September and December, recent experience suggests the bank may be reluctant to provide steers on its possible future policy path.

“If the ECB continues to increase interest rates substantially, and also the Fed does so, and, given the SNB raised rates by ‘only’ 75 basis points in their September meeting….when I take all that together, then we could see a policy rate change before the next scheduled meeting in December, probably at the end of October or early November,” Lein said in an interview.

The SNB’s next move is likely to be in the region of 25 to 50bps, with a larger step in December if necessary, Lein said.

“They will try to avoid making a step of 100bps or even more in December, in which case they will have to make one smaller step between scheduled meetings and then the larger step at the scheduled meeting,” she said.

TERMINAL RATE

The SNB’s decision last week to hike rates by 75bps to 0.5% was “appropriate” Lein said, given that inflation is still largely attributable to the rise in the prices of imported products, while inflation in the prices of domestic products and services is at only 1.8%.

It should not be necessary to go much higher in order to reduce inflation, she said,

“There is a lot of uncertainty, but my expectation is that we will go to a terminal rate of around 1.5%.”

Nonetheless, Lein added a caveat.

“Underlying this is my assumption that inflation expectations do not rise, which would make a much tighter policy necessary.”

Headline inflation can be expected to remain 3.5% for a few more months, before declining as a result of easing energy prices and tighter monetary policy, Lein said. Growth - which the SNB estimates at close to 2% for 2022 - will be relatively weak over the next two to three quarters, but will remain positive. (See MNI INTERVIEW: SNB Should Not To Hike Too Much -Ex Staffer)

FX INTERVENTION

Wage increases should be modest, and are unlikely to pile significant upward pressure on prices. However, increases in intermediate inputs, often imported and so highly dependent on both supply chains and the exchange rate, could trigger a policy response from the SNB, which has said it is prepared to intervene to stabilise the franc in either direction.

But the exchange rate levels at which the SNB would intervene remain “very vague”, Lein said.

“The SNB wants to keep open the possibility of intervening in both directions, but they also have not talked too much about indicators,” she said. “I think the real effective exchange rate, which is a broad-based inflation-adjusted exchange rate, will be important. If that moves sharply, they will probably intervene in the foreign exchange market to stabilise the Swiss franc.”

Banks will probably pass the rise in the policy rate to 0.5% on to savers, but only to offer a“slightly positive” rate, Lein said.

Public expectation that the SNB should generate revenues could prompt public debate later this year, Lein said.

“Of course, it makes sense to redistribute profits when they are there,” Lein said, “but this time there will be losses. If there are losses, the public discussion will be different and more dissatisfied, and that puts the SNB in a meaningless but uncomfortable position that can damage its credibility with the broader public.”