MNI SNB WATCH: Rate Cut On Knife-Edge As Disinflation Stalls

The Swiss National Bank's Governing Board faces a policy dilemma Thursday, with expectations of a further rate cut curtailed by the modest pick-up in inflation readings since early spring.

The SNB cut its policy rate by 25 basis points to 1.50% in March, the first of the G10 central banks to start reversing the sharp tightening seen since 2022.

However, as inflation has picked up, economists' expectations for the next cut are beginning to shift towards September. (See MNI INTERVIEW: SNB June Hold, But Sept Cut Possible - Lein)

Still, while it has accelerated from the 1.0% y/y low seen in March, headline inflation remains well within the SNB's price stability-defined target range. 

In the rates markets, the balance of probabilities still points -- just -- to a cut of 25 bps to 1.25% on Thursday, while economists lean slightly towards unchanged policy. Futures markets are currently pricing in about 17 bps of easing, or a 70% implied chance of a cut. 

Chances of a rate cut versus a hold this month are “50:50”, prominent SNB watcher Charles Wyplosz told MNI recently, although he cautioned that the fact that rates are already so low gives the SNB less room for manoeuvre and makes its moves this year harder to anticipate (See MNI INTERVIEW: SNB Cut Or Hold Decision "50:50" - Wyplosz).

CURRENCY EYED

The Swiss franc, which has appreciated in recent days following the ECB's rate cut and the financial market volatility in the wake of the surprise French election announcement, will remain a key factor in the SNB's decision making process.

The strengthening will obviously be seen as constraint of sorts on the economy and wider monetary policy, giving the Governing Board some leeway to act if needed. However, with inflation a touch higher, the options remain open.

However Switzerland's economic outlook does not obviously call for immediate easing. Sequential GDP growth has been moderate at the beginning of 2024 (0.5% Q/Q; see MNI's June Switzerland Macro Signal for more detailed analysis) and is projected to print at around 0.4% Q/Q in each of the quarters ahead until mid-2025. The SNB has broadly mirrored these developments in its March meeting when describing growth as “modest” and highlighting its projectiong for real GDP around 1% higher Y/Y in 2024.