SNB’s final rate hike risks ending franc’s rally

All eyes will be on the Swiss central bank as it weighs up another interest rate hike. © Keystone / Anthony Anex

The Swiss National Bank (SNB) will likely conclude its unprecedented tightening campaign with a quarter-point hike on Thursday, a move that risks putting an end to the franc’s peer-beating rally.

All but four of 31 economists in a Bloomberg survey expect the key rate to be lifted to 2%, with the remainder forecasting a pause. In anticipation, investors have ramped up bets against the franc, almost doubling their short position against the dollar.

The franc has outperformed all its Group-of-10 peers this year on the back of the SNB’s tightening campaign, reaching an eight-year high against the euro in July. Now, analysts say further tightening won’t be necessary given growth is faltering and inflation — unlike in other jurisdictions — has already returned to target. 

“Investors have grown sceptical on the franc rallies, and so have we,” said Athanasios Vamvakidis, head of G-10 foreign exchange strategy at Bank of America Merrill Lynch. “We are concerned the SNB is overtightening.”

With a quarter-point step, Swiss policymakers would mirror last week’s move of the European Central Bank, narrowing the spread between the two rates to 250 basis points. But given how much slower inflation is in Switzerland, the central bank’s stance has had an outsized impact.

Investors increased their short position on the franc versus the dollar in futures and options markets by almost 80% in the week ended on September 12, according to data from the Commodity Futures Trading Commission. 

Exchange rates

The franc traded at 0.96 per euro on Tuesday, having strengthened from a parity in January. It’s up more than 3% since the start of the year.

Not all economists are convinced an increase in borrowing costs is really necessary.

“The SNB doesn’t have to prove anything to anyone,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd, who is predicting a “hawkish pause.”

A move this week would put “unnecessary stress” on the economy, he said. “Instead, halting and hinting at the possibility of another move down the road would keep the debate from turning solely to cuts.”

Inflation has been within the SNB’s target range for the last three months. The key judgment question for officials will now be how much it will accelerate down the road. The costs for rents, electricity and public transport are set to rise and the government is also increasing value-added tax. These measures already pushed the central bank to forecast inflation at 2% or higher from the final quarter of this year. 

On top of this, unions are now demanding a 5% increase of salaries as they head into talks with employers. Their key motivator is that real wages in Switzerland have fallen two years in a row, translating into the biggest decline since 1942.

For UBS economist Alessandro Bee these combined factors don’t just point to a quarter-point hike on Thursday, but also makes him expect hawkish language that keeps the possibility of yet another increase on the table.

Growth cooling

“Inflation risks have rather grown since the summer,” he said. “We see a significant cooling of growth, but we expect price risks to still take centre stage at this meeting.”

Amid speculation whether the franc might have become too strong even for SNB’s inflation-fighting taste, investors will also watch closely for any hints on the central bank’s foreign-exchange sales. The central bank sold more than CHF60 billion ($67 billion) of international reserves to boost the local currency and reduce its balance sheet between the second quarter of 2022 and first quarter of 2023. 

“The SNB’s FX policy language should still emphasize the selling of foreign currency to ensure a strong franc given the coast is not clear on inflation,” Paul Mackel, global head of FX research at HSBC wrote in a note. 

Other things to keep an eye on:

• The money-markets department has a new interim lead: Board deputy Thomas Moser will likely make his first appearance at a rate decision, as no successor to Andrea Maechler — who exited in June — has been appointed yet.
• The SNB currently predicts 2023 growth of about 1%. Given the economy stalled in the second quarter, that prediction may be downgraded

©2023 Bloomberg L.P.

How we work

This news story has been written and carefully fact-checked by an external editorial team. At SWI swissinfo.ch we select the most relevant news for an international audience and use automatic translation tools such as DeepL to translate it into English. Providing you with automatically translated news gives us the time to write more in-depth articles. You can find them here. 

If you want to know more about how we work, have a look here, and if you have feedback on this news story please write to [e-mail].