MNI INTERVIEW: SNB Seen Nearing Tightening Cycle Peak

The Swiss National Bank is set to increase its policy rate for a fifth consecutive meeting next week, but is nearing its cycle peak as price pressures fade, two prominent Swiss economists told MNI.

Whether the SNB opts for 25 or 50 basis points this month is “50:50,” said Daniel Kaufmann, former senior economist at the SNB and now professor of applied macroeconomics at the University of Neuchatel, while Charles Wyplosz, Emeritus Professor of International Economics at the Graduate Institute, Geneva, foresaw at most a 25-point increase in the policy rate to 1.75%.

“Even if we think there are not many rate hikes still in the pipeline, the SNB will probably rather err on the upside when it comes to interest rate rises to bring inflation down clearly and persistently below 2%,” Kaufmann said, after May’s headline inflation fell to 2.2% ahead of next week’s monetary policy assessment. compared with 3.4% before the March decision.

Core inflation was 1.9%, down half a percentage point from February when the SNB raised rates by 50bp to 1.5% in pursuit of its 0-2% inflation target.

CYCLE PEAK

“As soon as headline inflation goes below 2% that is an indication that they will [soon] stop interest rate hikes,” Kaufmann said, noting that with Swiss rents partly tied to mortgage rates, policymakers will be wary of actually adding to inflation via additional rate increases.

In the long run the SNB would be content with an interest rate of 2% and with both inflation and productivity growth at 1%, which Kaufmann said were all within reach.

“This means that, roughly speaking, it has achieved its goal of inflation between zero to 2%, and decent economic growth. Such an outcome would be consistent with a soft-landing scenario that the central bank is hoping for.”

While Chair Thomas Jordan is likely to refuse to rule out further rate increases, the emphasis can now shift to foreign exchange interventions as the primary tool for managing inflation, Wyplosz said. A likely peak in rates at 1.75% followed by inflation easing to 1% without a serious slowdown would represent “total victory” for the SNB.

“They are not very good at explaining what they plan to do, but they will note that inflation is declining and getting close to what they want, and that they remain dedicated to bringing it down to the middle of the band. They will not say that, but everybody will understand that,” he said.

The SNB is most likely to downshift from the 50-basis-point hike at the last meeting, Wyplosz said.

“They will want to get to [an inflation rate of] around the 1%, or lower, but they are not far from it, and so it may make sense to be hawkish, it may make sense to raise a little bit another time,” he said. “But it's not clear that it would help, because there is no domestic inflationary pressure. Wages are very quiet. Food and energy prices are not rising anymore, so the effect is going to work towards continuous disinflation.”

Risks to growth - which the SNB said in March would reach 1% for the year - are tilted “slightly” to the downside, Kaufman said, but in the absence of a significant downturn in the U.S. and eurozone economies a recession is not on the cards.

FX INTERVENTION

Having already sold some 22 billion Swiss francs-worth of foreign currency last year, the SNB will continue to work to manage the exchange rate.

“They probably will try to continue to sell as much foreign currency as they think they can without a major appreciation that would cause complaints from the export industry,” Kaufmann said.

“Possibly the language will change, to highlight that an excessive appreciation is undesirable. Inflation of foreign products is actually quite clearly below 2% already, so the question is, do you want to offset high domestic inflation with low imported inflation? That may not be the optimal. On average it looks great, but it does create strains in different sectors.”