| RAMZI CHAMAT | OAKS GROUP SA
The Swiss National Bank (SNB) is at the center of attention as its monetary easing cycle could be nearing an end. This article delves into the outlook for the coming months, analyzing key factors that influence the SNB's decisions, such as inflation trends, Swiss economic growth, and the strength of the Swiss franc. Whether you're an investor or an economic actor, understanding these dynamics is essential to anticipate the impact on markets and the Swiss economy as a whole.
The Swiss National Bank (SNB) is expected to lower its key interest rate by 25 basis points to 1% in September 2024. This cut could be the final step in its monetary easing cycle, unless unforeseen factors like inflation or economic growth take a turn. But this decision raises questions: can the SNB keep this rate stable until 2025, or will further adjustments be necessary?
Inflation is one of the key factors driving the SNB's monetary policy. With inflation currently near 1%, the central bank finds itself in a position where any significant fluctuation could require action. If inflation drops below 1%, particularly due to falling energy prices, or if Swiss economic growth shows clear signs of slowing, the SNB might be forced to reduce its key rate further, potentially lowering it to 0.75% or below. However, this is not the SNB's baseline scenario at this time.
In its role of stabilizing the economy, the SNB also keeps a close watch on the strength of the Swiss franc. As a safe-haven currency, the franc tends to appreciate during times of uncertainty, which can put pressure on Swiss exports and thus on economic growth. The franc's recent appreciation has already led the SNB to consider an additional rate cut, although the central bank generally prefers to stay within its neutral range of rates unless the situation becomes particularly critical.
The Swiss franc plays a central role in the country’s monetary policy. Its recent appreciation has raised concerns, as a strong franc can make Swiss exports less competitive, putting pressure on the economy. Meanwhile, the U.S. Federal Reserve (Fed) has recently cut its own interest rate, increasing the likelihood of a narrowing interest rate gap between the dollar and the Swiss franc. This could further strengthen the Swiss currency, but the SNB remains cautious in its decisions.
Historically, the SNB has opted for significant rate cuts only during times of severe economic slowdown. In the current context, where Swiss growth remains moderate and inflation is under control, the central bank might choose to stabilize its rate after the expected cut in September. However, if inflation unexpectedly drops or the franc appreciates further, another rate reduction could still be on the table.
Current forecasts suggest that the SNB will maintain its key interest rate at 1% until 2025. This decision hinges on Swiss economic growth staying close to its current trend and inflation remaining stable near 1%. However, risks remain. For example, electricity prices are expected to decline in the coming months, which could lead to a faster drop in inflation than anticipated.
Moreover, recent economic growth has been below Switzerland’s potential. If this trend continues, particularly due to a prolonged weakness in the European industrial sector, the SNB could come under pressure to lower rates further in order to support the economy. In fact, another rate cut might be considered if inflation forecasts for 2025 are revised downward, especially due to falling energy prices.
Financial markets sometimes anticipate more aggressive moves than the central banks themselves. Currently, long-term Swiss franc bond yields suggest that investors expect more rate cuts than the SNB is projecting in its baseline scenarios. Although the SNB intends to stabilize its rate at 1%, yields could rise slightly in the coming months but would likely remain contained if further rate cuts are implemented.
On the currency market, the Swiss franc has also strengthened against the U.S. dollar. With the Fed beginning its own rate-cutting cycle, the interest rate differential between the two currencies is expected to narrow. This could weaken the dollar against the franc, with some forecasts placing the USD/CHF exchange rate at 0.80 by mid-2025. In contrast, the franc is expected to remain relatively stable against the euro. Although the European Central Bank (ECB) may also lower its rates, the SNB would be cautious about any excessive depreciation of the euro against the franc and could intervene to prevent the EUR/CHF from becoming too unbalanced.
As the SNB prepares to lower its key interest rate in September, this cut could very well be the last of this cycle, unless major economic factors disrupt the delicate balance. The evolution of inflation, the strength of the Swiss franc, and global growth prospects will all play a crucial role in future decisions. For now, the SNB seems poised to stabilize its rate at 1%, but markets and investors will need to stay vigilant in the face of the uncertainty that continues to hang over the global economy.
Source : UBS Switzerland SA
