MNI WATCH: SNB Hikes 25bps, More Likely Coming

The Swiss National Bank raised its policy rate by 25bps to 1.75% on Thursday, with chair Thomas Jordan arguing that further rate rises cannot be ruled out despite a more “gradual approach” being appropriate compared with the previous meeting’s half-point hike. (See MNI WATCH: SNB Likely To Hike 25bp, But 50bps Not Ruled Out).

Headline inflation stood at 2.2% in May, and is now expected to average the same amount this year before dipping to 2.1% - above the SNB’s target range of 0-2% - in both 2024 and 2025, reflecting upward pressure in measures of underlying inflation.

“We cannot at this stage rule out the necessity of further monetary policy tightening to achieve this objective,” Jordan said.

Jordan conceded that the Bank is in an easier position compared with some of its counterparts - with eurozone and U.S. inflation several percentage points higher than in Switzerland. But he asserted the SNB’s commitment to delivering on its mandate in a timely fashion.

Failure to do so would only create longer-term problems for the Swiss economy, he said, pushing back at “completely wrong” suggestions that interest rate rises should be tempered in light of their inflationary effect on housing rentals.

“It is clear that there is a certain temporary effect on rents, but there is no boomerang [effect]. We have to tighten monetary policy today. By not doing that today we would run the risk of having high inflation tomorrow and raise rates further,” he said. “The conclusion that we should therefore not raise rates would be completely wrong.”

Second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad were identified as key drivers of upward price pressures, although domestic goods and services are likely to account for a higher share over the forecast horizon.

FOREX INTERVENTION

The SNB reiterated its willingness to intervene in foreign exchange markets as necessary, and added the new phrase “in the current environment, the focus is on selling foreign currency.” (see MNI INTERVIEW: SNB Seen Nearing Tightening Cycle Peak).

Estimates for annual GDP growth remained steady but “subdued” at 1%, with unemployment expected to rise “slightly.”

The outlook for the world economy remains uncertain, Jordan said, with a pronounced slowdown abroad the main risk to Swiss growth and amid continued tightening by global central banks.

“In particular, the high level of inflation in some countries could be more persistent than expected. Equally, the energy situation in Europe could deteriorate again in Q4 2023 and Q1 2024.”

The SNB criticised Credit Suisse’s decision not to apply special features of AT1 bonds to absorb losses - including the cancellation of interest payments - in the earlier stages of the bank’s crisis in March, making state intervention “unavoidable”.

Following SNB liquidity assistance, outflows of deposits from the troubled bank led to an uptick in excess liquidity at other institutions that threatened to reduce demand for cash, lower the SARON reference rate and impair the transmission of monetary policy, SNB Board member Sabine Maechler said. The central bank used SNB Bills and repo transactions to remove liquidity from the system, ensuring franc money markets remained active, she said.

Having repaid the liquidity provided by the public, but with loans still outstanding, there are no plans to publish details of the SNB’s assessment of the state of the combined UBS/Credit Suisse bank before next June, Governing Board member Martin Schlegel said.