SNB Gauges Inflation Impact of a Weaker Franc
(Bloomberg) — The Swiss National Bank is about to reveal if it’s still relaxed about inflation risks after a marked weakening in the franc.
Officials on Thursday are widely anticipated to keep their interest rate at zero, which is the world’s lowest benchmark. Investors are likely to hone in on the outlook for consumer prices, and whether the Swiss are still poised to intervene in the currency.
The SNB’s stance of holding borrowing costs at the brink of negative is increasingly standing out at a time when peers from the US to the euro zone are tightening. That divergence seems to have succeeded in reversing haven flows into the franc caused by the war in the Middle East.
In recent days, the currency touched a 17-month low against the euro, and the weakest level against the dollar since June last year. A weaker franc makes imports more expensive, feeding through into consumer prices.
Most observers still don’t see the SNB being in any rush to shift views much on medium-term inflation, or to contemplate eventual tightening for now.
“If you have the luxury to be able to wait and see in the current situation, it’s probably best to do so,” said Ipek Ozkardeskaya, a senior economist at Swissquote.
The SNB’s sanguine approach compared with peers reflects a benign domestic situation. While inflation at 0.8% in August was the fastest in almost two years, that’s still well within its 0-2% target range.
The Swiss government last week kept predictions for consumer-price growth at 0.6% for this year and next. SNB projections often chime with that outlook.
While the war has stoked price pressures elsewhere, Switzerland remains relatively insulated, and electricity bills are even on track to fall.
One hint of a shift from the SNB may have come from President Martin Schlegel, who omitted usual language describing medium-term inflation pressures as “virtually unchanged” in a presentation earlier this month. It’s not clear if that was deliberate or simply parsed messaging before the decision.
Franc Language
He also didn’t mention the SNB’s increased willingness to intervene in the franc “if necessary.” Investors will watch if policymakers revert to that language adopted in June. Altering it would be an obvious acknowledgment that pressures on the currency have receded.
“Since Martin Schlegel took the helm, officials have increased efforts to create a certain degree of transparency,” said Brian Mandt, chief economist at Luzerner Kantonalbank, who predicts a first hike in March. “That’s why I expect that they will change their language.”
Any shift in communication could augur a switch in policy. One path for officials is selling foreign-currency assets to strengthen the franc and limit imported inflation, echoing their approach to the 2023 inflation surge.
Some commentators have even called on the SNB to take advantage of a weaker currency to offload assets anyway to shrink its out-sized balance sheet.
The central bank has done the opposite this year, buying 3.9 billion francs ($4.7 billion) worth of foreign exchange to contain inflows. Transactions for the second quarter will be published later this month.
Beyond those considerations, the overarching question is how long the central bank will its rate steady at zero while global peers are tightening.
Aside from the Fed and the European Central Bank, the Bank of Japan just raised again and the Bank of England warned of a potential move in November. Norges Bank may lift borrowing costs on Thursday in a decision that has split economists.
With investors betting on an SNB increase by March, some forecasters have begun advancing calls for hikes. Three out of 19 now predict a move early next year.
BAK Economics Chief Economist Claude Maurer expects action as soon as December. He sees a “window of opportunity” to rebuild easing space as the lower currency helps Switzerland’s export-dependent economy. Output adjusted for major sporting events surged 1.5% in the second quarter.
“When else would you hike?” he asked. “At any future time, it’s likely that either the economy will be weaker, or the franc stronger.”
Most economists don’t expect a move before 2028, in tune with the view inside the SNB in July. Officials anticipated the rate to stay at zero through the end of 2027 provided no new shock emerged, people familiar with their thinking told Bloomberg at the time.
This decision marks the end of an era, being the last prepared by veteran Chief Economist Carlos Lenz, who led the SNB’s economic affairs division for more than a decade. Martin Brown, director of the central bank’s academic research institution, will succeed him in October.
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