The Swiss National Bank will announce its policy decision at 07:30 GMT Thursday. This meeting is ‘live’ as market pricing implies a 70% probability for a rate increase. Even though Swiss inflation has started to creep up, there is no great urgency for the SNB to raise rates. Waiting until September and staying one step behind the ECB makes more sense, which implies downside risks for the franc next week.
The inflationary impulse that has swept through the global economy has finally infected Switzerland too. Consumer prices are rising at the fastest clip in 14 years as fuel and food costs have gone through the roof, putting pressure on the central bank to raise interest rates from the lowest level in the world.
One key difference between Switzerland and other economies plagued by high inflation is that wage growth remains suppressed. This suggests that inflation is truly driven by temporary factors like supply shocks, so there is no fear of a wage-price spiral that keeps feeding inflation for a long time. Inflation expectations remain subdued as well, arguing the same point.
Put another way, there’s no great rush to tighten monetary policy. The latest forecasts from the SNB expect inflation to fall back to 0.9% in the next few years. Those will most likely be revised upwards, but even so, they would need to show inflation running above 2% in the coming years before the SNB can justify raising rates.
In the ECB’s shadow
Turning to the upcoming meeting, SNB officials have not said anything concrete about raising rates lately. The most hawkish remark was that they would ‘not hesitate’ to take action if inflation proves persistent, which doesn’t seem to be the case so far.
Over the last decade, the classic pattern has been that the SNB follows in the footsteps of the European Central Bank, with a lag of a few months. This was done to avoid any excessive moves in the Swiss franc, by allowing the bigger player in the region to take action first.
The ECB just telegraphed its own rate increase for July, so the SNB would be breaking its own habits if it decided to act first at this meeting.
Since market pricing is tilted in favor of a rate increase, with a 70% chance of that happening, the risks surrounding the franc from this decision seem asymmetric. If the SNB does raise rates, the franc could gain but not massively, since this is already the market’s baseline scenario.
Taking a technical look at euro/franc, in this scenario the pair could edge lower towards the 1.035 zone. If that is violated, the spotlight would turn towards the recent lows around 1.0230.
On the contrary, if the SNB decides to wait until September, that might come as a surprise for traders given where market pricing stands, sparking a bigger negative reaction in the franc. In this case, euro/franc could pierce above the 1.0500 region and aim for a test of the 1.0550 barrier.
In the bigger picture, whether the SNB raises rates immediately or waits until September won’t make much of a difference. What’s important is that higher rates are coming. Negative interest rates are infamous as a tool that destroys currencies, and Switzerland has the lowest rates in the world.
Once the SNB finally exits negative rates, the franc could regain its composure.