MNI INTERVIEW: SNB To Keep Rates Negative In 2023 - Ex-Staffer

The Swiss National Bank is set to keep rates at negative levels throughout 2023 unless the European Central Bank hikes faster than expected, a former senior economist in the bank’s inflation forecasting unit told MNI, noting there were few signs of a durable rise in inflation despite the effects of the war in Ukraine.

The SNB is coming under pressure to raise its policy rate into positive territory from its current -0.75% as inflation hits 2.5% - higher than both the zero-to-2% target range and its March forecast of 2.1% for 2022. But base effects and core inflation at 1.5% mean the central bank’s expectations for inflation of close to 0.9% in 2023 and 2024 are still valid, even though it is expected to revise near-term forecasts higher in July, Daniel Kaufmann said in an interview.

“What the SNB’s conditional inflation forecast tells you is that SNB itself does not find it likely that they can increase rates,” he said.

“Inflation is not much above the SNB’s price stability range. A 75-basis-points increase in the policy rate may actually push inflation closer to the lower end given the fragile economic environment.”

ECB

However rate-setters led by Chairman Thomas Jordan would have no choice but to react should the ECB raise rates faster than markets expect, leading to stronger depreciation of the franc against the euro, Kaufmann said, adding that in such a situation the SNB could opt for a mix of balance-sheet reduction and rate increases.

“What they will do first isn’t clear,” he said. “Will they first sell foreign assets that they bought in their foreign exchange interventions, or will they first abandon negative interest rates? In my view, negative interest rates are so unpopular that they would probably do that first.”

Any move towards zero could come in two steps, though policymakers will preserve ambiguity as to their future rates path at their July meeting, said Kaufmann, an assistant professor at the University of Neuchatel, noting that the SNB’s inflation forecast is conditional based on a given point in the policy rate and that the recent elevation of Martin Schlegel to vice chairman of an enlarged Governing Board should not change the central bank’s approach

“The SNB wants to remain vague, and they want to retain their flexibility,” he said.

The franc, described by the SNB as “highly valued” in March but which traded at parity with a strengthening dollar for the first time in 19 years earlier this month, is unlikely to be of great concern to policymakers, he said.

“They will certainly focus more on the effective exchange rate, and more on the euro [than the dollar] because of its higher weight in trade patterns,” Kaufmann said. “At the moment I don't see that the levels for both currencies against the Swiss franc would lead to significant inflationary pressures.”

WAGE GROWTH

Swiss wage growth is still relatively contained, and much lower than in the eurozone or the U.S., with a recent survey by the KOF Swiss Economic Institute, at which Kaufmann is a research fellow, pointing to gains of just 1.5% in 2023. The country is also less exposed to Russian gas than major EU economies.

But Switzerland will inevitably be affected by the Europe-wide slowdown, said Kaufmann. In March, the State Secretariat for Economic Affairs lowered its annual growth forecast to 2.8% from 3%.

“A large part of this drag on growth is due to supply-side effects, and monetary and fiscal policy cannot make much difference if trade suddenly is interrupted,” he said. “But if you want to sustain a higher level of output, the danger that this creates an inflationary effect is higher.”

Supply-side disruption and the legacy of the pandemic have also made it more difficult to calculate the levels of output possible without sparking inflation, he said.