The Swiss National Bank will announce its policy decision at 07:30 GMT on Thursday. This meeting is “live” as market prices imply a 70% probability for a rate increase. Even though Swiss inflation has started to climb, there is no great urgency for the SNB to raise its rates. Waiting until September and staying one step behind the ECB makes more sense, implying downside risks for the franc next week.
Inflation is coming back
The inflationary impulse that spread to the global economy eventually hit Switzerland too. Consumer prices rise at their fastest pace in 14 years as fuel and food costs soar, putting pressure on the central bank to raise interest rates from the lowest level in the world.
A key difference between Switzerland and other high inflation economies is that wage growth remains suppressed. This suggests that inflation is genuinely fueled by temporary factors such as supply shocks, so there is no fear of a wage-price spiral that continues to fuel inflation for a long time. Inflation expectations also remain subdued, arguing the same point.
In other words, there is no great urgency to tighten monetary policy. The latest SNB forecasts expect inflation to fall to 0.9% in the coming years. These will most likely be revised higher, but even so they would need to show inflation above 2% in the coming years before the SNB can justify a rate hike.
In the shadow of the ECB
As for the next meeting, SNB officials haven’t said anything concrete about raising rates lately. The most hawkish remark was that they “wouldn’t hesitate” to act if inflation proved to be persistent, which so far does not appear to be the case.
Over the past decade, the classic pattern has been for the SNB to follow in the footsteps of the European Central Bank, with a lag of a few months. This was done to prevent excessive movement of the Swiss franc, allowing the biggest player in the region to act first.
The ECB has just telegraphed its own rate hike for July, so the SNB would be breaking its own habits if it decides to act first at this meeting.
Given that market prices are tilting in favor of a rate hike, with a 70% chance of that happening, the risks surrounding the franc from this move appear asymmetric. If the SNB raises rates, the franc could gain, but not massively, since this is already the basic market scenario.
Taking a technical look at the euro/franc, in this scenario the pair could drop slightly towards the 1.035 area. If this is breached, the spotlight will turn to the recent lows around 1.0230.
On the contrary, if the SNB decides to wait until September, it could surprise traders given the market price situation, triggering a larger negative reaction from the franc. In this case, the euro/franc could break above the 1.0500 region and aim for a test of the 1.0550 barrier.
Overall, whether the SNB raises rates immediately or waits until September will not make much difference. What is important is that higher rates are coming. Negative interest rates are infamous as a tool that destroys currencies, and Switzerland has the lowest rates in the world.
Once the SNB finally comes out of negative rates, the franc could regain its composure.