SNB Is About to Reveal Its Resolve on Franc Strength
(Bloomberg) — The Swiss National Bank’s determination to cap gains in the franc will draw the spotlight in a decision that is likely to avoid the more drastic option of negative borrowing costs.
Officials led by President Martin Schlegel are widely anticipated by economists to keep their interest rate at zero on Thursday. But with that quarterly judgment arriving less than three weeks since the central bank signaled possible currency intervention, their wording will be closely scrutinized.
“We will all focus on the communication,” said Nadia Gharbi, a senior economist at Banque Pictet in Geneva. “In the policy statement, the language will probably stay the same. But in the press conference, Schlegel will want to send a sharper message.”
War in the Middle East has forced the SNB to revert to its traditional role of harbormaster over a spate of safe-haven flows that pushed the franc to decade highs against the euro and made it this year’s best-performing major European currency versus the dollar — surges that will weigh on inflation.
Such was the market pressure in the early days of the Iran conflict that policymakers issued an unsolicited declaration saying their willingness to intervene had increased, adapting wording usually employed alongside Swiss rate decisions.
While that change in language, possibly matched by action, marks a shift from the SNB’s more judicious approach to foreign-exchange markets in recent years, it’s still less of an escalation than negative rates — a policy that would charge investors for holding the franc, at the cost of harming the economy.
The SNB announcement is taking place at a seminal moment for global officials taking stock of the fallout from the Iran war. Policy for eight of the world’s 10 most-trade currency jurisdictions is being set this week, with both the US Federal Reserve on the eve of the Swiss decision, and the European Central Bank just hours later, both likely to keep borrowing costs on hold.
Where officials can take some comfort is that inflation in Switzerland, while barely visible, is following the path they had projected after previous undershoots. Annual consumer-price is currently stuck at 0.1%, at the lower end of the SNB’s range of between zero and 2%.
More elevated costs for oil and gas might even help, though energy accounts for a smaller share of the national cost-of-living basket than in other economies.
The Swiss government on Wednesday tweaked its economic forecasts on higher energy prices, estimating weaker growth and slightly faster inflation this year. Expansion is now seen at 1% after 1.1% previously, while consumer prices are expected to rise by 0.4%, up from 0.2%. Its projections for 2027 stayed unchanged.
“The SNB would like to see slightly higher inflation,” said Alexander Koch, a senior economist at Raiffeisen Switzerland in Zurich. “That’s why it’s actually in a comfortable position to remain on hold. I would say that there is increased alertness, but it doesn’t feel pressure to act.”
In tune with that, the central bank’s forecast for consumer-price growth is set to stay largely the same, possibly with energy costs prompting a small correction to the upside over the next quarters.
What Bloomberg Economics Says:
“The Swiss franc remains substantially overvalued, according to Bloomberg Intelligence. This appreciation reflects mainly domestic and idiosyncratic factors. That should, all else equal, increase the effectiveness of intervention.
—Jean Dalbard, economist. For his SNB PREVIEW, click here
As the projection reflects policymakers’ views — the SNB has publicly called it part of its “communication materials” — the end point in 2028 will attract particular attention. A higher estimate than that given in December — 0.8% — could stoke expectations of eventual rate hikes.
The currency is likely to remain the key focus of policymakers for now, given that franc strength tends to depress inflation via lower import costs. It has reconciled that approach with US officials monitoring for manipulation.
In the central bank’s annual report released on Tuesday, it said a joint statement released with the US Treasury last year “confirms” that interventions “are an important monetary policy instrument for the SNB in the fulfillment of its mandate to ensure price stability.”
Some observers say there’s even a case to allow for a stronger franc at present, since it might exert a brake on inflation getting out of control.
“You almost want a positive currency right now to limit the pass-through risk, you know, from higher external energy prices,” Geoffrey Yu, senior market strategist at BNY, told Bloomberg Television. “I think their tolerance for a stronger franc is going to be stronger.”
As for the policy outlook, traders are pricing in higher Swiss borrowing costs already this year. Economists don’t see that transpiring before 2028.
“Hikes are expected in the global interest rate structure, and the Swiss market cannot completely decouple itself from this,” said Philipp Burckhardt, strategist at Lombard Odier Investment Managers in Zurich. “And there is little liquidity in the Swiss franc market.”
Then again, the SNB’s fearless attitude to shocking investors on prior occasions means a cut into negative territory can never be excluded, even if it’s deemed unlikely at present and would irk consumers.
Such a move would probably take shape with a jumbo half-point cut to maximize the step’s effect, according to multiple economists.
“If it makes sense, then they will do it, regardless of what the public thinks,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “The SNB has repeatedly shown that it doesn’t hesitate to make unpopular decisions.”
–With assistance from Naomi Tajitsu, Lizzy Burden, Tom Mackenzie, Kristian Siedenburg, Harumi Ichikura and Joel Rinneby.
(Updates with government economic forecasts in tenth paragraph.)
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