Bottom line: SNB policy looks to be in state of flux as Credit Suisse-induced share price reverberations have forced the Board to provide the bank with more liquidity. The SNB underscores that the problems of certain banks in the USA do not pose a direct risk of contagion for the Swiss financial markets as the strict capital and liquidity requirements applicable to Swiss financial institutions ensure their stability. In particular, the SNB stresses that Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks. Markets, however, remain more cautious, not least as Credit Suisse has been facing problems and questions for some time and where more drastic action may be required, including a possible take-over. Until the picture is clear this could tighten domestic credit conditions, irrespective of the level of official rates. A SNB hike on Mar 23 could still occur but more likely is a pause and one that may persist.25 bp is possible, with 50 bp being too hawkish.
Meanwhile, against a backdrop where Swiss CPI inflation has surprised a little on the upside so far this year rising to 3.4% with the even the core measures moving above the 2% target, a further 50 bp hike was (until the last few days) seen as very likely at this upcoming quarterly policy assessment. Admittedly, that hike was likely to be the last as the inflation pick-up is not likely to persist and even then is only what the SNB was projecting a few months earlier. Moreover, against the backdrop of the marked fall in energy prices, the SNB may be no longer project above target inflation at the end of forecast horizon (Figure 1), something that we then regarded back in December as being overly pessimistic. The SNB may also think that the Swiss economy is likely to flirt with a recession into early-2023 and where already fragile consumer confidence could be hurt further as the media highlights banking sector frailties.
In perspective, policy has been tightened notably, this a result possibly as much to quell soaring property prices rises of late as formal CPI inflation. Indeed, another, but more moderate hike, was duly delivered by the SNB in December, with a largely as-expected 50 bp increase to 1.0%, the third move since June encompassing a collective rise of 175 bp. Underlying then that no pre-commitment had been made in regard to future policy, the Board said ‘it that cannot be ruled out that additional rises in the SNB policy rate will be necessary’. Thus the SNB already has the flexibility in its rhetoric and in its in forecasts for a policy pause.
Figure 1: Inflation Seen Dissipating
Admittedly, the SNB in December continued a policy normalization but also gave no signal that the hiking cycle is at an end. It was never the case that at that juncture it could do so given the array of uncertainties that surround. Indeed, given the modest inflation overshoot it envisaged three year hence, it left scope, and possibly rationale, for at least one more hike. But the rationale behind the inflation outlook pick-up is hard to fathom fully, it at all. Domestically, it already seems that inflation may have peaked. Meanwhile, the ‘stronger inflationary pressure from abroad’ rationale the SNB assessment pointed to seems even more puzzling as global demand and supply pressures actually seem to be abating amid worries about global growth. The other rationale the SNB advertises, namely that ‘price increases are spreading across the various categories of goods and services in the consumer price index, also seems inconsistent with recent data, not least the SNB’s own underlying CPI barometers, including the trimmed mean measure which is rising more slowly that the formal core measures.
As for risks, while the SNB’s 0.5% GDP projection for this year is understandable and in line with consensus and our own thinking, most would regard that such an outlook to be dominated by downside risks. That projected growth rate is also less than half the economy’s potential rate and with the likelihood that this will create a modest negative output gap that will extend into 2024 even if (as we think) growth then recovers.
Given this backdrop and outlook, it is instead more likely the SNB has been keeping its options open to gauge a) what the ECB may do in coming months but b) more importantly see more data, including what is happening to what is still-solid growth in property prices. In this regard, even the SNB acknowledges that there are some signs of slowing.
Regardless, December’s hike took the policy rate further into positive territory (at 1.0%) and the move would chime with an overt SNB view that current solid-to-strong property prices rises are inconsistent with negative or near-negative interest rates.
In this regard, while the SNB may have confidence that its formal remit of controlling inflation is in reach, but that it has failed to address let alone puncture what may be excessive property price gains. However, given the manner in which house prices have been falling in some neighboring economies, the SNB will be careful what it wishes for, especially as any such weakness may only accentuate banking sector concerns.