MNI INTERVIEW: SNB To Wait Amid Eurozone Slowdown Fears

The Swiss National Bank will hold key interest rates at 1.75% and leave foreign exchange guidance unchanged this Thursday, with attention focused on the timing of its first rate cut of the cycle next year as the country’s eurozone export markets weaken, two leading Switzerland-based economists told MNI.

“I don’t expect a change. Everything points to waiting a little bit to see how things unfold,” said Daniel Kaufmann, a former SNB staffer,and now chair of applied macroeconomics at the University of Neuchatel. “The SNB also signaled at the last meeting that their focus is now on selling foreign exchange reserves and shrinking their balance sheet.”

Pipeline pressures from administered prices such as energy and rents could see a slight upside revision to the SNB’s inflation projection for 2024, Kaufmann said in an interview, after November’s inflation came in at 1.6%, well below the central bank’s Q4 forecast of 2%, and core dipped to 1.4%y/y. It was the sixth month in a row inflation had been within the target range of 0-2%.

But the SNB’s conditional growth projection for next year should remain at around 1%, said Kaufmann. The biggest downside risk to the very open Swiss economy would be a slowdown in major markets such as Germany, he said, noting that while SNB Chair Thomas Jordan is unlikely to close the door entirely to another hike, the main question is now the timing of a first rate cut.

DOWNSIDE RISKS

“There would have to be a new, or a changing environment for the SNB to consider further rate changes,” Kaufmann said. “That could be a recession abroad, and the risks of that have increased. But we’re not seeing it now, so at the moment there is no reason to change course.”

Rate cuts by the European Central Bank would add to arguments for the SNB to ease by putting upward pressure on the franc, said Charles Wyplosz, Emeritus Professor of International Economics at the Graduate Institute, Geneva. The SNB will also be reluctant to intervene to weaken the currency, he noted, at a time when it is attempting to reduce the size of its CHF 880 billion balance sheet.

“I suspect that the SNB will, as usual, wait until the ECB makes its move,” Wyplosz said, “Unless there are big surprises on oil and gas prices, on food, even though rental prices are rising inflation will keep declining well below 2% over the medium term.”

ECB

Wyplosz expects the ECB to be forced to cut rates sooner than it had expected. (See MNI INTERVIEW: ECB Hawks Fly Away As Germany Slows-Wyplosz).

“The SNB is in a bind,” Wyplosz said. “They are not in the habit of giving forward guidance, but there will be a delicate period later in 2024 or early 2025, when they will have to disassociate their monetary policy from that of the ECB.”

Once the SNB does begin to cut, it will do so in smaller increments than the ECB and may alternate between cutting and pausing, he said.

Kaufmann said the SNB might not wait for the ECB to cut rates first if the economy deteriorates.

“The economy is not doing great, there is the risk of a downturn. But only if the risks were large would it be a signal to cut rates,” he said.