SNB Acknowledges Market Expectations of Further Rate Cuts
(Bloomberg) — The Swiss National Bank acknowledges that investors anticipate more reductions in borrowing costs soon, two senior officials said on Thursday.
“Today, the swap curve is inverted, which is consistent with market participants’ expectations of moderate inflation and further cuts in the SNB policy rate in the near future,” policymaker Antoine Martin and deputy board member Thomas Moser said in a joint speech in Zurich.
After an unprecedented tightening campaign, Swiss officials in March delivered the first reduction of the current cycle by a central bank with one of the world’s 10 most-traded currencies.
The move was later vindicated by inflation unexpectedly slowing to 1%. Economists now expect one rate cut in June and another in September to bring the key rate down to 1% by the end of the year.
According to data presented on Thursday to the event of money-market professionals, the contribution of foreign prices to Swiss inflation was negative in the first three months of the year, while second-round effects persist in the domestic economy.
To limit imported price pressures, the SNB allowed the franc to appreciate by selling some of its vast foreign-exchange reserves. This led to a slowdown in inflation that was “faster than originally expected,” Martin and Moser said.
Taking past periods into account — during which the SNB had bought foreign currencies to weaken the franc — the two officials said that such interventions proved effective against both too high and too low inflation.
“This underscores the versatility of this instrument for maintaining price stability in Switzerland,” they said. “Without its FX sales, the SNB would have had to raise interest rates much more during the recent tightening cycle in order to ensure appropriate monetary conditions.”
Interventions have a “very quick impact” on imported inflation, as compared with using borrowing costs, Martin said during questions.
He also responded to a query on why the SNB doesn’t disclose more about its currency actions.
“We are transparent on our intentions — we don’t want to surprise markets,” he said. “But we don’t want to be too transparent, because then market participants can position themselves against that. We think that some reasonable opacity is beneficial there.”
Martin and Moser reiterated the path for consumer-price growth that policymakers gave at their latest decision in March, seeing it staying within the 0-2% tolerance band they target through 2026.
“Our latest forecast indicates that inflation is likely to remain within the price stability range over the next three years, even taking into account the recent interest-rate cut,” they said.
(Updates with more comments starting in ninth paragraph)
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