SNB: Pause and End Tightening Cycle
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Bottom Line: The SNB paused the rate hike cycle as the board reset its view on slower inflation momentum and as inflation forecasts were reduced (Figure 1). Indeed, the statement leaves the impression that this is most likely a peak for official rates, though FX sales to reduce the balance sheet are still planned. The debate could eventually swing around to SNB official rate easing in 2024.
Figure 1: SNB CPI Inflation Projections on 1.75% Policy Rate (%)
Source: SNB
SNB Surprises With No Hike
The SNB surprised with no change in policy, despite widespread market expectations of a 25bps hike to 2.0%. Key issues behind the pause include.
•Inflation decline in recent months. Inflation has been under better control than the SNB expected and we have highlighted that once seasonal adjustment occurs for CPI that the monthly core trend is zero! – see here. The SNB statement places emphasis on the slowing global picture, but also tightening domestic financial conditions.
•More apprehensive on growth. The SNB statement is somewhat more nervous on H2 growth saying it will remain weak. Even so, they kept the 2023 GDP forecast at 1%, which would imply 1.5% in H2 and this looks too high.
•Lagged tightening to weigh on inflation. The SNB projections into 2025 are noticeably lower than in June (Figure 1), with the 2% inflation objective being achieved in 2025. The SNB notes that the lagged effects of tightening should now deal with linger inflation pressures.
The question is whether the pause is now the end of the tightening cycle. The SNB statement does note a tightening bias remains just in case inflation surprises on the upside, while SNB 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 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 are also tightening via a rundown of FX reserves and the September statement makes clear 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.
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.