MNI STATE OF PLAY: SNB To Hike, With Risks Seen To The Upside

The Swiss National Bank is widely expected to raise its rate paid on sight deposits by 75bps on Thursday, with upward price pressures and recent Federal Reserve and European Central actions increasing chances of a hawkish surprise.

Core inflation has surged to 2% year-on-year, with headline annual inflation at 3.5% in August, up from June and July’s 29-year high of 3.4 % - well above the SNB’s 0-2% target range.

June’s decision to raise rates by half a point to -0.25% was taken after the SNB forecast inflation at 2.8 % for 2022, 1.9 % for 2023, and 1.6 % for 2024, and with chairman Thomas Jordan warning that more hikes could not be ruled out.

Jordan is expected to seize the opportunity to exit negative territory, having warned in his speech at Jackson Hole that recent inflation developments, while triggered to a large extent by supply shocks with a temporary impact, have spread to other categories of goods and services. There was a risk of underestimating the persistence of inflation, and “robust monetary policy decisions” were required, he said.

FED, ECB HIKES

Recent 75bp hikes by the Fed and the ECB and the prospect of more to come have further strengthened an increase of up to 100bps by the SNB - which will not meet again until December - either to do some frontloading of its own or to signal its willingness to react sooner.

A significant downward revision in the outlook for GDP growth this year - which the SNB put at 2.5 % in June - is also possible, but is unlikely to influence Thursday's decision. The latest Swiss Federation estimates slumped from 2.6 % in June to just 2 % this week, with projections for 2023 cut back to 1.1 %, and slowdowns in the U.S. and China cited as important factors. Nevertheless, experts have warned against going too far, too soon (MNI INTERVIEW: SNB Should Not Hike Too Much - Ex-Staffer)

With the franc trading at close to par with the dollar and the euro, a repetition of June’s assertion that the bank is willing to be active in the foreign exchange market “as necessary” could also be on the cards, with the possible addition of “forceful.”