SNB Preview: Clearly Staying on Hold
Bottom Line: The SNB paused the rate hike cycle In September and we see that decision being matched (ie the policy rate staying at 1.75%) for the quarterly policy assessment verdict due on Dec14.Ifanything, the decision may be more clear-cut as growth downside risks have risen, house price inflation has dissipated while CPI inflation has fallen and undershot SNB thinking (Figure 1).Indeed, adjusted CPI data suggest inflation of late is running nearer an annualized 1% than the 2% SNB target (Figure 2), all meaning that the Board reset on the inflation outlook seen in September (so that it will remain below target) is likely to be repeated, if not accentuated. This gives an even clearer impression that a peak for official rates has already occurred, though FX sales to reduce the balance sheet are still likely to be envisaged. Regardless, we see policy staying on hold through the coming year with probable easing arriving in 2025.
Figure 1: SNB CPI Inflation Projections Back Below Target
Source: SNB
SNB Surprised in September With No Hike
The SNB surprised with no change in policy at its September assessment, despite widespread market expectations of a 25 bp hike to 2.0%. This reflected the inflation decline of previous months and implicit if not explicit apprehension on growth. That last SNB statement was somewhat more nervous on H2 growth saying it will remain weak, with even that feeble projection now looking overly optimistic. Indeed, the SNB kept the 2023 GDP forecast at 1%, which would imply 4% annualized growth this quarter and this looks too high: we see a flat outcome at best.
The question is whether the pause is now the end of the tightening cycle. The SNB statement last time did note a tightening bias remains just in case inflation surprises on the upside, while SNB President Jordan in the press conference did note that the inflation forecast in 2025 was just below target and any inflation surprises could bring it back above target. However, the opposite has been the case as CPI inflation this quarter may be 0.3-0.4 ppt below the SNB's 2.1% y/y forecast (Figure 1) and where m/m adjusted data suggest an even weaker profile (Figure 2). Thus, the rest of the statement, plus the inflation projection, leaves the impression that the SNB does not expect to hike interest rate further. It is worth remembering that the SNB is also tightening via a rundown of FX reserves and the December statement is likely to suggest that this will continue. Overall, we see the SNB cycle having peaked and a period of current policy rate will exist through the winter. It is noticeable that the SNB did not follow the ECB in hiking in September and the decoupling is a combination of the SNB more aggressive balance sheet rundown and better controlled inflation than in the EZ.
Figure 2: CPI Inflation Dynamics Very Much Waning
Source: SNB, CE
Indeed, the debate could pivot in 2024 towards whether the SNB has done too much and inflation risks undershooting target by 2025, as the SNB is too upbeat on GDP momentum and also the SNB has been undertaking dual tightening (official rates and sharp balance sheet reduction) to tighten financial conditions. This could eventually see market expectations swing around to idea of SNB rate cuts, though the first SNB step would likely be to slow or stop balance sheet reduction.