SNB lowers inflation expectations as it keeps rates at 1.75%

The Swiss National Bank (SNB) maintained interest rates unchanged after its monetary policy meeting today (December 14).

However, it lowered inflation expectations and toned down the need to carry out FX interventions to support the franc’s exchange rate. Most analysts read the policy statement as a dovish turn that opens the door to a rate cut in the first half of 2024.

After today’s decision the key policy rate remains at 1.75%. The SNB also maintained that it will remunerate banks’ deposits at the policy rate “up to a certain threshold” and above it the remuneration will be 1.25%.

“Inflationary pressure has decreased slightly over the past quarter,” says the policy statement. The consumer price index increased year on year by 1.4% in November, down from 1.7% in October, according to official data.

The SNB explained lower inflation is mostly due weaker price pressures on goods and tourism services. “However, inflation is likely to increase again somewhat in the coming months due to higher electricity prices and rents, as well as the rise in VAT,” adds the statement.

Still, the overall message the Swiss central bank conveyed today was that monetary policy does not need to be tighter, if anything it will become looser soon. 

“Policy-makers placed less emphasis on selling FX assets and reduced their inflation forecast for 2024,” point out Adrian Prettejohn, Europe economist with Capital Economics. “This supports our view that the SNB will cut rates at the next meeting in March, and we have pencilled in a total of 75 basis points of cuts for 2024.”

The SNB revised down inflation expectations across the projection horizon. It now expects inflation to average 2.1% in 2023, 1.9% next year and 1.6% the year after. The September projections expected inflation to average 2.2%, 2.2% and 1.9%, respectively.

This means inflation is forecast to remain within the 0–2% inflation target throughout the projection horizon.

“Reduced inflationary pressure from abroad and somewhat weaker second-round effects are resulting in a downward revision,” says the policy statement.

However, lower inflation also stems from lower economic activity. The SNB expects economic growth to remain weak in 2024. “Subdued demand from abroad and the tighter financing conditions are having a dampening effect,” says the policy statement. 

The SNB expects GDP to grow by around 1% this year. For 2024, the SNB projects growth of between 0.5% and 1%. 

Stronger franc

One key element of today’s policy decision was to change the policy statement regarding FX interventions.

Over the last year, the SNB has been selling part of its foreign currency reserves to boost the franc’s exchange rate. The central bank sales have reached Sfr30 billion ($34.4 billion) per quarter. This strategy aimed to decrease import price pressures.

Now that inflation is falling the SNB removed from the previous policy statement the reference that “in the current environment, the focus is on selling foreign currency.” 

“This suggests that the SNB will at least start to taper its sales of FX assets over the coming months,” says Prettejohn. “The reduction in, or possibly cessation of, FX sales next year is one reason why we expect the franc to underperform in 2024, after being the best performing G10 currency this year.”

The SNB’s interventions have contributed to this stellar performance. The Swiss franc has appreciated by 6.9% against the US dollar so far in 2023, and by 4.1% against the euro.