Furthermore, the central bank said it sold CHF27 billion of foreign currency in 2022Q4 to support the Swiss franc, thereby tightening monetary conditions and limiting imported inflation. The SNB said it will consider again this option to compound the effects of higher interest rates and bring inflation back to target. These comments point to at least another rate increase, possibly in June, although the size of any hike may be reduced.
Investment Insights • MFN
2 min read
The SNB stays hawkish
The Swiss National Bank stayed the course on its inflation fight and, despite recent financial sector turmoil, raised rates by 0.50% to 1.50%. The SNB’s language remained more hawkish than expected, reiterating that additional rate increases “cannot be ruled out”.
Chart 1. EUR/CHF exchange rate and PPP
Source: Refinitiv and EFGAM calculations. Data as at 23 March 2023.
The SNB’s hawkishness reflects the upward revision of its conditional inflation forecasts, which now see inflation staying above the 0-2% target range up to the end of 2025. The central bank noted price increases are now “broad-based”, pointing to the risk that the current high level of inflation becomes embedded in private sector expectations.
Chart 2b. Swiss inflation and SNB policy rate
Considering the risks to the outlook, the SNB acknowledged that developments in the financial sector increased uncertainty. The central bank’s confidence in the conditional inflation projections is probably lower today than usual and a downside scenario where inflation returns to target in the not too distant future cannot be excluded.
Overall, the SNB decided to separate the fight against inflation from financial stability related issues. On the latter, the central bank is providing ample liquidity to the system. However, financing conditions for the non-financial sector have tightened, reflecting the increased cost of funding for banks, itself a consequence of the turmoil in the financial sector.
Therefore, there is a risk that the SNB’s policy tightening proves too aggressive and causes unnecessary damage to the economy. The challenge for the central bank will be to strike the right balance between fighting inflation and preserving financial stability.