Tuesday, March 28

Swiss Franc’s Brake on Inflation Keeps SNB Calm: Decision Guide

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The Swiss National Bank is getting a rare opportunity to enjoy the benefits of a strong exchange rate as it keeps a lid on inflation that’s spiking elsewhere in the global economy.

Officials would previously have shown concern at a surge in the franc that briefly brought it to parity with the euro this month. But now, its braking effect on imported prices is likely to reassure them at Thursday’s monetary policy decision.

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That may set the scene for the SNB to stick with the world’s lowest interest rate for longer even as the stance of the neighboring European Central Bank shows signs of shifting amid mounting inflation worries.

“The SNB is not in the same situation as the euro zone or the US,” said Credit Suisse Group AG economist Maxime Botteron, who predicts the SNB will wait until June 2023 before its first rate hike. “There is no urgency to tighten monetary policy policy.”

Under President Thomas Jordan, the central bank in Zurich remains one of only four worldwide to apply subzero rates, along with counterparts in the euro region, Denmark and Japan. At -0.75%, it is currently deeper than any of them.

Swiss inflation is also noticeably lower than in other major economies. It is now at 1.9%, compared with 5.9% in the euro zone. The US’s own measure of annual consumer-price gains is even higher at 7.9%

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The franc provides a significant buffer. Even after Russia’s invasion of Ukraine further stoked energy costs, government officials predicted last week consumer-price gains would average only 1.9% this year — below the SNB’s 2% ceiling — and slow to 0.9% in 2023.

Considering the damping effect of the exchange rate, some economists reckon the central bank may also avoid intensifying rhetoric on the franc beyond its last description as “highly valued.”

The currency breached parity against the euro on March 7 amid safe-haven flows sparked by the war, but then fell back again. It was close to 1.03 per euro on Wednesday.

“I don’t think the SNB will become more aggressive in their wording,” said Alessandro Bee, an economist at UBS Group AG. “Parity is the threshold where they are ready to intervene. Parity has a psychological importance.”

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Such SNB action has also been restrained. Sight deposit numbers have risen just 0.44% this month, suggesting only limited interventions when parity was reached.

Meanwhile, not only is the central bank highly unlikely to raise its rate soon, but it may well openly lag any tightening elsewhere. This month SNB Vice President Fritz Zurbruegg said it’s important for Switzerland to maintain lower rates than the euro area to avoid appreciations of the franc.

“There is no need to take action and it is better to stay back and watch developments,” said Raiffeisen Schweiz economist Alexander Koch. “The SNB will lag behind the ECB and other central banks because they can afford it.”

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