Following the energy price shock after the invasion of Ukraine in 2022, the SNB increased its policy rate by 250 basis points (bp) from -0.75% to 1.75% in June 2023. Karsten Junius, Chief Economist at J. Safra Sarasin Sustainable Asset Management, shares his insights.
We don’t expect a similar development in the coming quarters as the current economic environment differs in two important aspects. Firstyl, the energy price shock in 2022 occurred after Covid-related supply-side bottlenecks had already lifted Swiss producer prices by 7.5% yoy. This time producer price inflation stood at -2.5% yoy before the war started.
Secondly, currently, the output gap is negative, the unemployment rate is above average, and capacity utilisation in manufacturing is below average. In 2022, manufacturing capacity was highly utilised as households were keen to spend the savings made throughout the pandemic.
May consumer prices stable at 0.6% yoy
Rather moderate consumer price inflation data of 0.2% mom and 0.6% yoy in May confirm the differences to 2022. The low core rate of 0.3% and the index ex petroleum products of 0.2% yoy indicate that the upside risks to inflation are so far low. The slightly higher headline rate 0.6% explains why the downside risks to inflation and the probability of negative rates are also very low.
Domestic goods and services as well as services inflation confirm that up- and downside risks to the inflation target are not huge. If anything, May’s inflation data surprised on the downside as prices of petroleum products declined by 0.7% mom. Overall, inflation and monetary policy are in a good place so far.
Inflation projection is likely to be revised up slightly – yet for 2026 and 2027 only
While we are confident that inflation will remain within its target corridor of 0% to 2% over the SNB forecast horizon, we see the need for the SNB to revise up its inflation projection for 2026 and 2027. Inflation has increased more than expected by the SNB in March which should lift the quarterly averages from 0.5% to 0.6% in Q2, and from 0.6% to 0.8% in Q4.
We also believe that the SNB will have to acknowledge the likelihood of some second-round effects as higher energy prices are increasing the prices of intermediate inputs around the globe. According to the KOF survey, expected price changes are picking up in all major business sectors – even if they do so less than in 2022. Input and output prices of the purchasing manager surveys confirm this trend. Back in 2022, higher inflation expectations supported higher wage growth. To a certain degree, we could see a repeat of such situation next year.
Yet, it would be welcome this time around as at current levels wage growth would lead to rather uncomfortably low domestically generated inflation. While we expect an upward revision of the inflation profiles in 2026 and 2027, we see no reason to revise up the profile for 2028.
Higher inflation projections would not signal a rate hike
Again, it is important to understand the similarities and differences between the currentsituation and the one in 2022. They explain why a higher inflation profile for 2026 and2027 shouldn’t be interpreted as a signal of upcoming rate hikes. Labour scarcities werevery elevated in 2022, while they are more moderate right now. At 3.1%, thecurrent seasonally adjusted unemployment rate is still higher than the long-term average of 2.8%, as the Swiss Federal Council highlighted last week.
The Council expects no material improvement and has extended short-term work schemes of up to 24 months until end-January 2027. We are slightly more optimistic that the labour market is improving asindicated by a higher KOF employment assessment and a rising number of vacancies. Still, we don’t think this would lead to excessive wage growth. We wouldalso find tighter monetary policy at times when the government is supporting the labourmarket an inconsistent policy mix.
FX-interventions are no longer needed
Back in March, we have argued that FX-interventions would be the most appropriate policy tool to prevent a deterioration of Swiss companies’ external competitiveness and an undue tightening of financing conditions. Balance sheet data of the SNB suggest that FX-interventions indeed took place in March and to a smaller degree in April.
We believe that they are probably not needed in the coming months for several reasons. Firstly, financial markets got used to the policy uncertainty in the Middle East such that safe haven flows should remain moderate. Secondly, the nominal exchange rate has depreciated slightly since the last policy meeting such that the real exchange rate has fallen by around 1% – 2%. This has moderated the overvaluation.
Thirdly, it also seems that the export sector has once again adjusted to the strong exchange rate. The manufacturing sector was particularly strong in Q1 this year, while the hotel sector seems to be robust, as highlighted by a recent speech by the SNB President Schlegel. As a result, foreign demand contributed 0.4 percentage points to the sport-event adjusted GDP growth rate of likewise 0.4% qoq in Q1.
New FX section for the policy statement is needed
In the last policy statement, the SNB stated: “Given the conflict in the Middle East, the SNB’s willingness to intervene in the foreign exchange market has increased. The SNB thereby counters a rapid and excessive appreciation of the Swiss franc, which would jeopardise price stability in Switzerland.” Since the March meeting, the SNB has frequently referred to its “elevated willingness to intervene in the FX market.” In the next statement the SNB could condition this willingness somewhat, such that it becomes clear that the hurdle for interventions is higher.
Between December 2023 and December 2025, the SNB simply stated the following: “The SNB remains willing to be active in the foreign exchange market as necessary.” Combining these two formulations, the SNB could state for example: “Given the ongoing conflict in the Middle East, the SNB’s willingness to be active in the foreign exchange market as necessary remains elevated.” The SNB could also highlight that the upward pressure on the exchange rate has eased. In any case, by putting less emphasis on the topic, the SNB could make clear that it is less concerned about the exchange rate.
The overall statement should be perceived as dovish
Money markets are still pricing a rate hike of 25bp by March. We don’t believe that the SNB would be interested in fuelling rate hike expectations further. Therefore, it might try to downplay the need for FX interventions and rate hikes. It could do so by stressing more strongly that it had to reduce the GDP forecast for 2027 from 1.5% to around 1%.
