Before the SNB meeting on 20 June, markets attached a probability of around 70% to a 0.25% rate cut, according to futures prices. The selloff in the Swiss franc that followed the SNB announcement suggests that it surprised some market participants.
This likely reflects the mixed tone of Swiss data released since the SNB cut rates in March. Some data would have supported waiting for more evidence that inflation is under control and other pointed to cutting rates again. Clearly, the second option prevailed, but to gauge the future path of SNB policy rates it is useful to consider the full information set.
Of the data that would have supported a pause in the SNB easing cycle, the rebound in headline CPI inflation from 1.0% y-o-y in February to 1.4% y-o-y in April and May stands out. Although inflation in the second quarter is aligned with the SNB’s March conditional inflation forecasts, it suggests that inflationary pressures have not fully disappeared.
Another factor that supported an unchanged policy stance is GDP growth. Although the SNB noted that quarterly GDP growth was moderate in Q1 2024, it was slightly above potential. Furthermore, the central bank expects GDP growth to rise to 1.5% next year, suggesting that the SNB monetary policy stance was not too restrictive even before the new rate cut.
Finally, the Swiss franc has been weak since the March interest rate cut, only regaining part of the lost ground in the weeks before the 20 June SNB meeting due in part to uncertainty stemming from the unexpected French elections. Even after the recent gains, the Swiss franc remains weaker than in Q1 of this year. This points to an increased risk of imported inflation at a time of high and volatile commodity prices.
Clearly, the SNB considered that the factors supporting a further easing of monetary policy were persuasive. Among them, the sharp fall in producer prices has likely played a role. Historically, PPI (Producer Price Index) inflation has led Swiss core and domestic CPI (Consumer Price Index) inflation. On this basis, perhaps the SNB concluded that underlying inflationary pressures have eased compared to early 2024.
