Amidst further cuts, what action will The Swiss National Bank make next?

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.

Chart 1. Swiss inflation trends (yoy)

Source: LSEG Data & Analytics and EFGAM calculations. Data 20 June, 2024.

In addition, analysis of the drivers of the recent rebound in inflation has probably reassured the SNB. The increase in inflation since the last SNB meeting is mainly due to oil products and rents, the latter reflective of past monetary policy tightening. Indeed, net of rents and electricity prices, which are largely determined outside of Switzerland, Swiss inflation was only 0.4% y-o-y in May.

Looking at the growth outlook, the PMI and KOF surveys (the KOF Globalisation Index measures the economic, social and political dimensions of globalisation) for the April-May period were weak. While improving slightly, activity and orders indexes remained below par. Moderate retail sales and services activity probably suggested to the SNB that domestic demand is unlikely to generate meaningful inflationary pressures. Tensions linked to the forthcoming French elections represent a downside risk to Swiss growth should the eurozone economy weaken or the Swiss franc appreciate strongly.

Finally, President Jordan has recently noted that the neutral real interest rate in Switzerland may be around zero. If that is the compass for monetary policy in the medium term, the projected fall of inflation below 1% in 2026 and beyond, absent an immediate reduction in the policy rate, also supported an interest rate cut.

Chart 2. SNB conditional inflation forecast (yoy)

Source: Swiss National Bank. Data 20 June, 2024.

Jordan’s comment on the level of the neutral real interest rate provides useful guidance for future Swiss monetary policy. Absent any new shocks, there is room left still for a further reduction of the policy rate, possibly before the end of 2024.

Interestingly, market expectations for the remainder of 2024 and 2025 see rates levelling off around 1.00%, broadly in line with Jordan’s comments on the level of Swiss neutral real rate.

Chart 3. Swiss 3-month interbank rate implied in futures contracts

Source: LSEG Data & Analytics and EFGAM calculations. Data 20 June, 2024.