What’s next for the Swiss economy?

Inflation is slowing in Switzerland but the economy remains subject to a great degree of uncertainty. What does the latest Swiss National Bank policy meeting tell us about the outlook?

On hold as inflation dips

The Swiss National Bank (SNB) refrained from tightening monetary policy at its September meeting in a move that may have caught markets off-guard but served to reaffirm the central bank’s priorities. The economy appears to have reached the upper end of this cycle, in our view, even if the bank is not ruling out the possibility of further tightening. 

Many had expected the bank to raise rates by 25bps, echoing the ECB’s most recent rate rise. Instead, the SNB left rates unchanged at 1.75%, saying that recent tightening was acting to counter inflationary pressures. It highlighted that its forecasts for the Swiss economy were subject to a “high uncertainty”. Yet, the bank also adjusted its new conditional inflation forecast very slightly, but very significantly, especially at the longer end. At 1.9%, the SNB now expects inflation to remain below its 2% target by September 2025, therefore in the range of its remit for price stability. Previously, it predicted inflation at 2.1% in this time horizon.

The bank’s rhetoric suggests to us that it seeks to burnish its inflation-fighting credentials first and will look at reducing its balance sheet secondly. For now, the SNB is prioritising inflation above all other indicators, and indeed, Swiss inflation has weakened considerably in recent months to just 1.6% in August. Other Swiss inflation indicators such as core and trimmed CPI have fallen sharply as well and reside lower than in other major economies.

The bank left unchanged its language about currency interventions, saying it continues to be active, mainly by selling foreign currency. As it takes several months for current monetary policy to impact the economy, the SNB can now focus on the currency and continue to gradually reduce the balance sheet.
 

PMIs diverge

Alongside the fall in CPI inflation, the Swiss economy has echoed the divergence in manufacturing and services PMIs seen globally, illustrating the uncertainty of indicators. As shown in figure 1, manufacturing has shown softness while services are holding up better in a situation that is somewhat reminiscent of mid-2019.


Figure 1. Divergence between Swiss services and manufacturing PMIs

Source: Credit Suisse, procure.ch. For illustrative purposes only. As of September 2023.

Why this divergence? On the one hand, manufacturing is the backbone of the slowing economy and will reflect the removal of policy accommodation. Services, however, have lagged this slowdown as consumers still purchase services, such as holidays, that they missed during Covid. As such, services have shown a lower sensitivity to price rises and there is a higher bar on the service side to tame consumer spending. 

We see the risk that services and manufacturing could converge more going forward as tight financial conditions eat further into the consumers’ pockets and eventually deplete the stack of excess savings. 
 

Liquidity for mortgages

Liquidity provision in Switzerland is a key issue following the turmoil in mid-sized US banks and the demise of Credit Suisse. To address the potential that banks may need large amounts of liquidity quickly, the SNB unveiled an initiative to provide liquidity against mortgages as collateral to Swiss banks that have made the requisite preparations. 

It focused on mortgages because as SNB states “they are by far the most significant illiquid balance sheet item in the banking system”. The SNB also developed a digital process to standardise transfers and cited this as contributing to the further progress of digitalisation and efficiency in banking.
 

An independent and surprising SNB

Two aspects of the SNB’s actions stand out for us. It acts independently of other central banks and it uses an element of surprise to make its policy announcements more effective. 

While the global context obviously influences the SNB, it has a high degree of independence when setting policy. Thus, the SNB hiked first in June 2022 and preceded the ECB’s hiking cycle. At the same time, the SNB did not feel the need to replicate the ECB’s latest interest rate increase this month. To us, this illustrates the SNB’s policy does not mechanically mirror other central banks. 

The SNB also communicates differently with the market than other central banks. The Federal Reserve favours guiding the market’s expectations and pricing ahead of its decisions, for instance, to smooth market reactions. The SNB, on the other hand, can deliver quite unanticipated decisions – such as the surprise removal of the franc peg to the euro in January 2015 – using the marked market re-pricing to further achieve its policy aims. The SNB has indicated no urge to steer market expectations too precisely and we expect it will generally continue to fight inflation by being proactive, as opposed to providing detailed forward guidance.
 

New policymaker joins

Antoine Martin has been announced as a new member of the governing board of the SNB, replacing Andrea Maechler from January 2024. The appointment of Martin, a French-speaker, ensures the representation of the Francophone part of Switzerland. Martin has spent much of his career in US Federal Reserve Banks and could also serve to refute criticism that the SNB is too insular. Lastly, with just three governing board members on the SNB, we note that the clout of policymakers in Switzerland is greater than in other global central banks with more board members.
 

Done, depending on data

In the current environment, we believe the SNB has completed hiking rates for now. Should inflation accelerate into December, the bank could deliver one more rate rise, but this will depend entirely on the data. We see the bank’s current stance as a stop (rather than a pause) to rises, especially in light of our more prudent outlook for the global economy.
 

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