5 things to watch from the SNB

After years of negative rates and currency interventions, Swiss monetary policy is on the cusp of change. As expectations build for the Swiss National Bank to begin tightening policy, what five things should investors be aware of? 

1. Risk of a surprise. There is a risk of a somewhat stronger market reaction than usual to the Swiss National Bank’s (SNB) June meeting. Unlike the Federal Reserve and European Central Bank (ECB), which favour guiding market pricing and avoiding surprises, the SNB feels no urge to steer market expectations too precisely and, as a result, a rate hike of about 15bps is currently priced in. The SNB has meaningfully increased its level of communication recently – indicating change is ahead – but we expect it will generally continue to keep an element of surprise on its side.
    
2. No hike just yet. We believe the SNB will refrain from raising interest rates at its June meeting and instead wait until September before embarking on a hiking cycle. When the bank does begin increasing rates, we think they will consider increments of 25bps or 50bps, if needed. Such moves would be in line with today’s ECB statement.
    
3. Francs and balance sheets. Furthermore, the SNB is likely to switch gears in its communication and stop labelling the Swiss franc as being “highly valued”. This inevitably opens up discussion about when and how to reduce the central bank’s balance sheet, which we believe the SNB will address in the near future. There is no urgency, but the risks of running a large balance sheet are elevated while the benefits appear less obvious than in the past.
    
4. Flexibility matters. The Swiss economy is resilient and can weather headwinds from nominal CHF appreciation and volatility, especially as the real effective exchange rate does not seem excessively overvalued, in our view. Additionally, a stronger franc could tame inflationary pressures, giving the SNB more flexibility in its interventions.
    
5. Not the first mover. The main reason to wait in our opinion is that although inflationary pressures are building, the momentum is nonetheless slowing, large parts of the spike can be attributed to supply-side shocks and, most importantly, the long-term projection of inflation is still below the upper range of the SNB’s definition of price stability. Indeed, today the ECB communicated its intention to start hiking rates at its July meeting and proceed with a likely 50bp increase in September. We believe the SNB will take note of ECB policy, as it often does, but that it is in no hurry to act and prefers to preserve the interest-rate differential with the Eurozone by not moving first on rates.

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