21 May 2024 — Ramzi Chamat
SNB forecast: Rate reduction in sight | UBS Analysis 2024
The Swiss National Bank (SNB) is at the center of the attention of analysts and investors, as it prepares to adjust its monetary policy in a complex economic context. Stable inflation and moderate economic growth dictate the actions of the SNB. This report is based on detailed analyzes by Maxime Botteron and Florian Germanier of UBS Switzerland AG, and presents an overview of expectations regarding future SNB decisions and their impact on financial markets and the Swiss franc.
Introduction
In an economic context marked by controlled inflation and below-potential growth, the Swiss National Bank (SNB) is preparing to adjust its monetary policy. According to a report by UBS Switzerland AG, written by economists Maxime Botteron and Florian Germanier, the SNB is expected to reduce its key interest rate twice this year. This article explores these forecasts in detail, the implications for the bond market, and the expected effects on the Swiss franc.
I. Current Economic Context
The SNB plans to lower its key interest rate by 25 basis points in June and September 2024, thus reducing the rate from 1.50% to 1.00%. These adjustments are anticipated due to inflation remaining within the target range of 0% to 2% and economic growth remaining below trend.
II. Monetary Policy and Forecasts
SNB Key Interest Rate:
-
Current: 1.50%
-
June 2024: Expected reduction of 25 basis points
-
September 2024: Another reduction of 25 basis points, reaching 1.00%
-
Maintenance: Rate expected to remain at 1.00% until the end of 2025
III. Bond Market and Yields
Swiss Government Bonds (10 years):
-
Current Yield: 0.7%
-
Forecast: Stabilization around 0.7% in the coming months
2-Year Bonds:
-
Current Yield: 0.9%
-
Forecast: Decrease to 0.7% by the end of 2024
IV. Inflation and Economic Growth
Inflation is currently within the target range and is expected to decrease slightly in the second half of 2024. In April, inflation was 1.4% year-on-year, compared to 1.0% in March. Another unexpected rise in inflation in May could delay the rate cut scheduled from June to September.
V. Impact on the Swiss Franc
Short Term: The weakness of the Swiss franc is expected to continue due to the SNB's lead in the monetary easing cycle. Medium Term: The Swiss franc is expected to appreciate against the US dollar, as rate cuts are expected to be more pronounced abroad, particularly in the United States, where the Federal Reserve could begin its easing cycle in September.
VI. Risks and Influencing Factors
Higher-than-Expected Inflation: A higher-than-expected inflation rate could delay the rate cut. Interest Rate Differential: The Swiss franc could depreciate further if the ECB and the Federal Reserve delay their rate cuts, influencing the SNB's decisions.
Conclusion
The SNB appears ready to prudently reduce its key interest rate, with two cuts planned in 2024 to reach 1.00%. The bond market already reflects these cuts, with a forecasted stabilization of long-term yields and a slight decrease in short-term yields. The Swiss franc is expected to be weak in the short term but appreciate in the medium term, particularly against the US dollar. These forecasts consider various economic risks, including inflation and the policies of other central banks.
