MNI SNB WATCH: To Cut and Signal More As Inflation Undershoots

MNI (LONDON) - The Swiss National Bank is primed to cut rates on Thursday, with a 25 basis-point cut in the Policy Rate to 0.75% looking the most likely outcome, although a bolder 50bp reduction cannot be ruled out, given the continued undershooting of its own inflation forecasts.

Market pricing is split down the middle, with a 50% chance of a 50bp cut, though analysts and economists are leaning slightly towards a smaller reduction, particularly as Q3 growth outperformed expectations at 0.2% q/q following growth of 0.4% in Q2.

At the time of the September meeting, when rates were cut for a third consecutive time by 25bp to 1.0%, headline inflation stood at 1.1% y/y -- and declined to 0.7% in November. SNB President Martin Schlegel -- taking his first meeting as head – has since said "downward risks to Swiss inflation are bigger than upward risks.

FRONT-LOADING

The market expects continued front-loading of rate cuts, with guidance indicating that more easing is likely if disinflationary pressures persist. Market pricing now suggests the benchmark rate will fall to zero some time in 2025, a point recent SNB estimates consider is consistent with the neutral level of interest rates, or “r*”.

Even at the current low policy rate, there appears plenty of room to the downside, with Schlegel saying that negative rates remain firmly in the toolbox for policymakers.

In September, the board signalled no change in the SNB's forex intervention policy, especially given "strong influence of developments abroad on Swiss inflation," repeating its to keep franc appreciation at bay.