MNI: SNB In Close Call, With 25Bp Hike On The Table-Economists

The Swiss National Bank will consider hiking its key policy rate for a sixth consecutive meeting this week, raising it by 25 basis points to 2%, a potential SNB board candidate told MNI, but other senior economists said low growth and falling inflation mean a pause is not out of the question.

University of Basel macroeconomics professor Sarah Lein - reported to be a candidate for the SNB’s three-person Board - agreed that the outlook for September’s decision is unclear, with a risk that inflation could undershoot the central bank’s target range over the medium term as energy price rises fade .

“My guess is that they will still raise by 25 basis points to be consistent with previous communication, even though I think it’s unnecessary,” she said. “If they raise rates, they will argue that the inflation forecast is probably too close to the upper band of the inflation target and they want to make sure the inflation returns more robustly to within the band.”

Though unlikely to turn negative, the 1% 2023 GDP growth rate the SNB projected in June also looks optimistic, she said, with most inflation drivers since surprising to the downside and substantial policy lags still to take effect. Dips in foreign demand for Swiss goods and a stronger franc have also helped keep price pressures down, she said.

FALLING INFLATION

The SNB also hiked by a quarter-point in June, taking its cumulative tightening since the cycle began to 250bp, and said further rises could not be ruled out, as average annual inflation was projected to be 10-20bps above the target range of 0-2% in 2023, 2024 and 2025. (See MNI INTERVIEW: June SNB Hike May Be Cycle's Last - Ex-Staffer)

However August's year-on-year headline inflation fell to 1.6%, with core inflation at 1.5%. The consumer price index rose by just 0.2% compared with July, despite the cost of domestic products growing by 2.2%.

“I think they won't hike,” said Yvan Lengwiler, a former senior SNB economist, now also a professor of economics at Basel.

“I wouldn't call it a hawkish pause, it’s just a stop. If inflation is between zero and 2%, I don't see that they have to send any other message than “goal achieved. The SNB has a second instrument. Foreign exchange interventions have a much quicker effect on the inflation rate, so they can fine tune.”

Prominent Swiss-based economist Charles Wyplosz agreed there is a “strong” case for a pause. Cutting the link with recent ECB tightening might be a concern, he added, but would also have upsides.

RISK TO FRANC

“There might then be a risk of weakening of the franc, which would add to inflation,” he said. “However, the SNB may welcome that, as if the franc is weak they will have to intervene on the foreign exchange market and that would shrink their balance sheet. I think they will pause and be ready to intervene, but it’s likely to be a very close call.”

Energy prices will be key to future price and interest rate dynamics, Wyplosz continued, pointing both to recent oil and gas market volatility and a pre-announced 28% increase in electricity prices from next year which has “vaccinated" Switzerland against any serious deflation.

“Inflation is going to probably rise, and it might go above 2% for a little bit of time. Equally, if oil and gas prices start declining, then the risk of negative inflation could become an issue. That's a risk they have to factor in, but I don’t think the price to pay for that would be big.”

Policymakers will probably stick to June’s announcement that the SNB remains willing to be active in foreign exchange markets as necessary, with the focus on selling foreign currency, Lein said. Wyplosz was less sure: “If they keep it in, it means they are ready to be a little more hawkish. They might actually drop that line.”