SNB Reviews Franc Alert Level Before Middle East Peace Deal

(Bloomberg) — The Swiss National Bank will this week reveal if it’s too soon to dial down its franc rhetoric before a prospective Middle East peace deal becomes reality.

With economists and investors widely anticipating no change in the interest rate from the present level of zero, remarks by President Martin Schlegel and his colleagues will draw attention for hints on the path of borrowing costs and any dilution to language on interventions aiming to curb the strength of the currency.

The decision on Thursday will once again showcase Switzerland’s fairly unique position in the global financial landscape. Unlike the neighboring euro zone, where officials just raised rates, the country faces benign inflation that has been contained by the strength of a currency long seen as a haven in times of international turmoil.

The franc surged after the US attacked Iran earlier this year, prompting the SNB to warn that it had a heightened “willingness to intervene.” Now, with an interim peace accord set to be signed in Switzerland on Friday, the currency is noticeably weaker against the dollar and euro than before war broke out.

“Immediate pressure on the Swiss franc has eased somewhat,” said Alexandra Janssen, chief executive officer of ECOFIN Portfolio Solutions in Zurich. “But from a medium-term perspective, you have to expect that that the situation will change and pressure on the franc will increase again.”

It was in early March, shortly after the outbreak of war, that the SNB issued an unsolicited statement that it was readier than normal to step into foreign-exchange markets. That contrasted with its approach in recent years to use interventions only judiciously.

Officials have since repeated their language consistently since then. Whether through such actions or with the ebbing of hostilities, the currency has lost some 1% against the euro since then. If a peace deal now holds, the threat may no longer need to be as forceful.

“The SNB doesn’t usually give updates on such things between its quarterly rate decisions,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “If policymakers want to communicate a different view on the franc, Thursday will be the moment.”

Junius said the SNB will probably signal readiness to intervene, but might make the message more conditional. He speculated a possible formulation could be to say “interventions appear less urgent.”

Such a line would chime with Schlegel’s recent emphasis that the franc’s nominal appreciation over the past decade has been much larger than its real increase. The SNB previously stressed that the real exchange rate is more relevant for monetary policy.

But with the experience of a shaky truce in recent weeks, officials may instead wait to see that hostilities have ceased durably, preserving their existing language to keep maximum flexibility.

Whether the SNB actually followed through on its intervention threat in March isn’t yet known. Data for the first quarter will be published on June 30.

Unlike peers facing noticeably higher inflation, the economic backdrop for the central bank is relatively benign. At 0.6% in the past two months, price growth is on track to only slightly exceed its quarterly forecast, and well within its 0-2% target range.

Aside from the franc, a key question is whether officials will ultimately seek to raise rates one day. Just two out of 16 economist surveyed by Bloomberg currently expect that to happen this year, and the median forecast is for the first move to materialize only at the start of 2028.

“A rate hike before the end of the year can’t be ruled out,” said Gianluigi Mandruzzato, senior economist at EFG Bank in Zurich. “Back in March, the issue was still too low inflation. Now, the situation is more a normal one of possibly too high inflation.”

The SNB could potentially lift its short-term projection for consumer prices, given recent outcomes. That’s unlikely to affect the bigger picture as described by Schlegel that medium-term inflationary pressures are essentially unchanged.

Arthur Jurus, an economist at Oddo BHF, said price growth is on a “trajectory the SNB is likely to interpret as a welcome normalization from uncomfortably low levels, rather than the beginning of a sustained inflationary cycle.”

Even so, underlying pressures remain weak. Producer and import price inflation was deeply negative in May, at -1.8% from a year earlier, showing that domestic momentum is feeble beyond the global energy shock.

One consideration for the SNB is that keeping its rate at zero puts pressure on the financial system. That’s why Jean Dalbard of Bloomberg Economics expects a “gradual hawkish pivot” over time, culminating in a hike in December.

Then again, if the Iran deal holds, the case for an increase could lessen, given that Swiss inflation is so weak. That might even raise the prospect of a reduction one day, reviving the pre-war debate about the impact of negative borrowing costs.

“Risks are now balanced between a cut and a hike as a next move down the road,” said Safra’s Junius.

–With assistance from Harumi Ichikura, Kristian Siedenburg and Joel Rinneby.

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