Swiss National Bank Preview (Sep 21): A Last Hurrah?
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Bottom line: A further but final rate hike is not likely from the SNB when it gives it next quarterly assessment on Sep 21; the envisaged 25 bp hike to 2.0% would take the policy rate effectively to a 22-year high. The fact that the ECB hiked in the last week provides the SNB with what it may suggest is a rationale for tightening policy further, even though its balance sheet reduction (and inter-related Swiss Franc gains are already providing tighter financial conditions. This is evident in the weak economic backdrop (where the economy stagnated in Q2) and the ensuing softness in inflation (where core rates are running well below the 2% SNB target and even in the clear slowing in house prices. Indeed, the SNB will have to pare back what we consider is an optimistic real economy outlook. As a result, we think that by the time of the next (December) assessment, other DM central banks will have paused more definitively and that this will add to factors that will make the SNB do likewise.
Figure 1: Core Inflation Clearly Softening Markedly
Source: SNB
Significant Tightening
In what seemed to be a continued complacent assessment, the SNB met market expectations and raised its policy rates by a further 25 bp to 1.75% in June, half the increase it pushed through in previous assessment in March.This meant that the policy rate had been increased a cumulative 250 bp since tightening began 15 months ago and this has clearly had an impact on banking matters, particularly credit growth s has the SNB balance sheet reduction. We estimate that this is now some 90% of GDP, down from nearly 150% in early-2021. Regardless, back in June, the same tightening bias was evident as the SNB left its options open, still suggesting that it cannot exclude more hikes and also sticking with an inflation outlook that leaves the target missed by a notch at the end of the 2-3 horizon.But this partly reflects a still over-optimistic growth assumptions and an assessment of more persistent global price pressures.
Moreover, the SNB was been forced to markedly revise down its near-term inflation outlook, a reflection of the manner in which CPI data has slowed of late and on a broad basis.This has continued in the last few months.The SNB may suggest that this softer CPI inflation backdrop is nothing more than it expected, but this misses the point that recent inflation declines have come in spite of higher oil prices and encompass clear declines in the various measures of core inflation.Indeed, our estimates of seasonally adjusted core inflation suggest recent m/m figures are nearer zero than the 2% target.
Policy Considerations
Rising interest rates are taking a toll widely, but very clearly on credit growth and the SNB should also be aware that the emerging signs of slowing in the Swiss property market may have repercussions in due course, both for the bank and for the economy generally, something that Financial Stability Report acknowledged implicitly, in suggesting that apartment prices are still very over-valued by up to 40%. In this regard, we remain puzzled by the above-consensus economic outlook for this year with the SNB’s GDP growth forecast in June doubled to 1%, almost twice our own thinking and projection that would necessitate q/q growth averaging 1.6% annualized, ie above Swiss trend growth for the rest of this year and that even after perky Q1 outcome.Indeed, business survey data have taken a clear turn for the worse of late, highlighting not just downside risk but that the latter may be materializing enough to make us think that the 0.7% GDP growth we envisage this year will not be bettered in 2024 materially. Notably back in June, the SNB acknowledged global growth risks, seeing an international growth outlook in the coming quarters being subdued and subject to significant risks on the downside, which now seem to be materializing.
In perspective, policy has been tightened notably already, this a result possibly as much to quell what were once soaring property prices rises as formal CPI inflation. We feel that the SNB already has the flexibility in its rhetoric and in its in forecasts for a policy pause from here-on.However, more likely there will be further hike next Thursday but that for the above reasons, it will prove to be the last in the cycle.