Switzerland: A Franc Assessment of Growth Risks
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Bottom Line: Markets are unsure whether the SNB will hike again when it next gives it policy assessment on September21. We are more of the view that policy has peaked, not just because the ECB may have stopped hiking but because already-below target inflation may continue, if not fall further. This is a result of not just controlled wage pressures and rising interest rate but also the growing impact that the ever-clearer Swiss Franc appreciation may be taking on both real activity and price pressures. Indeed, the trade-weighted currency has risen by almost 10% in the last year (Figure 1), the most since the effective cap against the euro was removed in early-2015, that heralding the beginning of negative interest rates from the SNB .Notably, in a small open economy likely Switzerland such currency swings have marked implications for real activity (Figure 2) and for CPI inflation (Figure 3).
Figure 1: Marked Rise in Franc Continues
Source: SNB
Policy Backdrop
In what now even more seems to have been a complacent assessment, in June, the SNB met market expectations and raised its policy rates by a further 25 bp to 1.75%, half the increase it pushed through in its previous assessment in March.As a result, the policy rate has been increased a cumulative 250 bp since tightening began 12 months earlier.The same tightening bias seen at previous assessments was left intact, 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 exceeded by a notch at the end of the 2-3 horizon.But this partly reflects what are still over-optimistic growth assumptions and an assessment of more persistent global price pressures all highlighted by actual recent CPI inflation undershooting SNB projections, even after it was forced to markedly revise down its near-term inflation outlook.
Currency Exacerbating Tighter Financial Conditions…
Since that June meeting the Swiss Franc has appreciated even further.As Figure 1 highlights, the trade-weighted currency has risen by close to 10% in the last year.This is the most since the effective cap against the euro was removed by the SNB in early-2015 and with almost half of this appreciation having occurred since the June policy assessment.This is very much bolstering the even clearer impact that actual rate hikes have had on the economy.The latter is very much highlighted by domestic credit growth running at around 2% a third of the rate two years earlier and also what are still subdued wage pressures with recent survey data suggesting companies anticipate no more than 2% pay increase on average in the coming year!.But the currency strength seems to be taking a clearer toll on real activity and particularly economic confidence (Figure 2), the latter already down to levels historically consistent with flat to negative GDP growth.
In this regard, we remain even more puzzled by the still above-consensus economic outlook for this year where in June the SNB’s GDP growth forecast doubled to 1%, 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.Moreover, we see still below-par growth into 2024 of around 1%.
Figure 2: Marked Rise in Franc Hitting Confidence
Source: SNB, SECO
…And Price Pressures Receding
Regardless, the rise in the currency also implies direct as well as indirect downward pressures on prices, not least at the consumer level (Figure 3). Agonist this backdrop and outlook, the SNB’s June inflation outlook looks even more overly pessimistic in which the SNB actually has a higher medium-term inflation projection which moves back above the 2% target toward the end of the 2-3 year forecast horizon. While the SNB is unlikely to pare back its inflation outlook to the below 1.5% numbers we have for 2024 and 2025, we think the June projection will be revised lower and back under target at the Sep 21 assessment, removing any clear rationale for further hikes in interest rates!
Figure 3: Marked Rise in Franc Points to Marked Easing in Price Pressures
Source: SNB