In a widely expected move, the Swiss National Bank raised its benchmark policy rate 25 basis points to 1.75% on Thursday and said it would not rule out further increases as it raised its inflation forecasts for the coming two years.
The rise in the bank’s inflation expectations “means that more tighter monetary policy is likely necessary,” SNB Chairman Thomas Jordan said. He noted that the bank will continue to adjust to consumer price growth, with the next projections and rate decision due in September
Jordan said for this month, the current environment made a 25-basis point hike a more sensible move than a 50bp increase, the latter of which was expected by a number of analysts.
Following Thursday’s decision, investors were anticipating another 20bp hike in September.
The franc showed some slight traction against the euro after the increase, and the bank said it remains willing to intervene in currency markets when necessary.
“Since the last monetary policy assessment [in March], the Swiss franc has appreciated by around 2% on a trade-weighted basis,” said SNB governing board member Andrea Maechler. “In order to ensure appropriate monetary conditions, we have sold foreign currency in recent quarters.” She said the bank will buy or sell the franc if and when needed.
“The SNB is staying the course,” wrote Thomas Gitzel, chief economist at VP Bank. “It is gradually moving towards higher key interest rates.”
He noted that unlike the ECB and the Fed, the SNB can proceed much more methodically with its plans to tighten monetary policy.
That pesky inflation
Part of the reasoning behind analysts’ expectations of a 50bp hike this week was that the bank is only scheduled to make monetary policy decisions once a quarter, even though it can change rates when it wants to. “The inflation rate in Switzerland was 2.2% most recently and even 1.9% if volatile energy and food prices (core rate) are factored out,” Gitzel explained. With today's interest rate hikes, the base rate and inflation rate are converging. A rate hike of 50 basis points was therefore not necessary.”
He noted that SNB comments about not ruling out further interest rate hikes sends an unequivocal signal: “This is a relatively clear forward guidance for the SNB – hence, another increase of 25 basis points in September is as good as set.”
Further grounds for another increase come from revised annual average inflation forecasts from the Swiss lender. While it lowered this year’s estimate to 2.2% from 2.6% in March, it raised the 2024 projection to 2.2% from 2.0% and the 2025 expectation to 2.1% from 2.0%.
“From 2024 onwards, the new forecast is higher than in March, despite today’s increase in the SNB policy rate,” the bank said. “The reasons for this are ongoing second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad.”
“Core inflation in particular is still stubbornly elevated,” the SNB noted.
Capital Economics was one of a large group of central bank observers that had predicted a 50bp rate hike, and Chief Europe Economist Andrew Kenningham wrote that more tightening appears likely as the SNB’s statement and the “upward revision to inflation forecasts for 2024 and 2025 strongly suggest that there will be at least one more hike in this cycle.”
He predicted that the move would come at the Alpine central bank’s next meeting in September. “As the SNB now forecasts inflation to be above its target range of ‘positive but less than 2%’ over the next two years, it is pretty clear that policymakers expect to raise rates further. We are currently forecasting rates to peak at 2.25%.”
The bank reiterated its March forecast for economic growth this year of around 1%.
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- 25-basis point hike was widely expected
- Staff raises medium-term inflation expectations
- Bank cannot rule out further rate increases
- Higher consumer price forecasts suggest another hike
By Eric Culp, European Editor
LiveSquawk News
@EricCulpLS
22 June 2023 | 09:00 GMT
In a widely expected move, the Swiss National Bank raised its benchmark policy rate 25 basis points to 1.75% on Thursday and said it would not rule out further increases as it raised its inflation forecasts for the coming two years.
The rise in the bank’s inflation expectations “means that more tighter monetary policy is likely necessary,” SNB Chairman Thomas Jordan said. He noted that the bank will continue to adjust to consumer price growth, with the next projections and rate decision due in September
Jordan said for this month, the current environment made a 25-basis point hike a more sensible move than a 50bp increase, the latter of which was expected by a number of analysts.
Following Thursday’s decision, investors were anticipating another 20bp hike in September.
The franc showed some slight traction against the euro after the increase, and the bank said it remains willing to intervene in currency markets when necessary.
“Since the last monetary policy assessment [in March], the Swiss franc has appreciated by around 2% on a trade-weighted basis,” said SNB governing board member Andrea Maechler. “In order to ensure appropriate monetary conditions, we have sold foreign currency in recent quarters.” She said the bank will buy or sell the franc if and when needed.
“The SNB is staying the course,” wrote Thomas Gitzel, chief economist at VP Bank. “It is gradually moving towards higher key interest rates.”
He noted that unlike the ECB and the Fed, the SNB can proceed much more methodically with its plans to tighten monetary policy.
That pesky inflation
Part of the reasoning behind analysts’ expectations of a 50bp hike this week was that the bank is only scheduled to make monetary policy decisions once a quarter, even though it can change rates when it wants to. “The inflation rate in Switzerland was 2.2% most recently and even 1.9% if volatile energy and food prices (core rate) are factored out,” Gitzel explained. With today's interest rate hikes, the base rate and inflation rate are converging. A rate hike of 50 basis points was therefore not necessary.”
He noted that SNB comments about not ruling out further interest rate hikes sends an unequivocal signal: “This is a relatively clear forward guidance for the SNB – hence, another increase of 25 basis points in September is as good as set.”
Further grounds for another increase come from revised annual average inflation forecasts from the Swiss lender. While it lowered this year’s estimate to 2.2% from 2.6% in March, it raised the 2024 projection to 2.2% from 2.0% and the 2025 expectation to 2.1% from 2.0%.
“From 2024 onwards, the new forecast is higher than in March, despite today’s increase in the SNB policy rate,” the bank said. “The reasons for this are ongoing second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad.”
“Core inflation in particular is still stubbornly elevated,” the SNB noted.
Capital Economics was one of a large group of central bank observers that had predicted a 50bp rate hike, and Chief Europe Economist Andrew Kenningham wrote that more tightening appears likely as the SNB’s statement and the “upward revision to inflation forecasts for 2024 and 2025 strongly suggest that there will be at least one more hike in this cycle.”
He predicted that the move would come at the Alpine central bank’s next meeting in September. “As the SNB now forecasts inflation to be above its target range of ‘positive but less than 2%’ over the next two years, it is pretty clear that policymakers expect to raise rates further. We are currently forecasting rates to peak at 2.25%.”
The bank reiterated its March forecast for economic growth this year of around 1%.