By Karsten Junius, chief economist at J. Safra Sarasin
The SNB will face a difficult situation next Thursday. It will have to balance the need to fight inflationary pressures that were stronger than anticipated in December with the one to preserve the stability of its financial system and its largest banks. We expect that the SNB separates these issues as much as it can which would speak for an interest rate hike plus the willingness to provide additional liquidity lines if needed, similar to the approach the ECB adopted at its meeting this Thursday.
The SNB has an advantage compared to the ECB and Fed as it can monitor the market reaction to their interest rate decisions. Absent the current market turmoil, we would have expected a 50bp hike and a discussion on how much the SNB can fall behind the ECB with its rate hikes. We still expect a rate hike by 50bp, but the discussion more likely is on the fragilities in the Swiss banking sector and in particular within its largest banks. In general, we believe that central banks should be aware that the sharp increase of policy and market interest rates has reduced the fair value of many financial and real assets significantly. The losses the SNB had to report for last year makes this very transparent. It is less transparent in hold-to-maturity portfolios that are not necessarily marked to market. The SNB might be forced to comment which further safety measures it would consider if needed.
In its monetary policy assessment, the SNB is likely to confirm its previous growth forecast of around 0.5% for this year. While some risks of its previous assessment did not materialise like energy shortages in Switzerland, risks for the global economy originating in the financial system might be considered to be higher this time. Additionally, the 0% GDP growth rate in Q4 2022 limits the carry-over effects from last year.
The SNB is likely to conclude that the inflation environment has not improved yet. In December, the SNB projected an inflation rate of 2.1% for 3Q 2025 in its inflation profile last quarter. Since then, oil prices have fallen but food prices have been increasing globally and in Switzerland much more than expected. Higher food prices cannot be taken lightly by the SNB as those prices are highly visible for consumers and could change their inflation perception more than price changes in other categories. Additionally, their weight of 11.0% is almost twice as high as the 5.7% energy and fuels have.
More worrying is the continuous increase of core inflation to 2.4% year-on-year, its highest level since 2001 when it was published the first time. Price pressures are relatively broad based as shown by the trimmed mean core rate that strips out the most extreme price change. The only positive development that can be mentioned is that producer prices fell on a month-on-month base in February. They have also seen their peak on a year-on-year base and in general remain much more moderate than in other countries such that the cost pressure that producers might still pass on to consumers is not that elevated anymore. However, as the exchange rate did not appreciate further on a trade weighted base since September it cannot mitigate price pressures anymore. On a real trade weighted level, they are even lower than at the beginning of 2021.
Obviously, a stronger exchange rate would help to reduce prices in Switzerland. The SNB has also clearly stated that it wouldn’t resist a certain appreciation of the Swiss franc. However, that is easier said than done as currently all central banks are interested in a stronger exchange rate and most have to fight inflation with significantly higher rates than those that we can expect from the SNB. As a result, interest rate differentials between Switzerland and the euro area or the US have widened significantly to 1.5% before this week’s ECB decision. The SNB is unlikely to let this differential become even wider this month.
