SNB Preview (Sep 25). Staying at Zero Amid Credit Cross Currents?
Having the SNB cut the policy rate by 25 bp back to zero in June, as widely expected, we see no further change for the time being, and with little likelihood of any move at the quarterly assessment due later this month (Sep 25). Indeed, despite barely positive inflation, markets have priced out what was previously a good chance of rates turning negative, even against a backdrop of the punitive tariff scheme the Swiss economy faces and which will damage the real economy and also add to already weak price pressures. Mainly this fresh swing in market thinking has been a result of clear hints from the SNB Board itself suggesting that there is now a high bar for any return to negative borrowing costs because of the adverse impact on savers and pension funds. Indeed, SNB President Schlegel stressed in a recent interview adverse impact of negative rates on the likes of savers and pension funds, going on to warn that doing so may need stronger countermeasures later on, this possibly a result of the fresh pick-up in property prices now emerging.
Figure 1: Weak Credit Growth a Sign of Bank Caution?
Source: SNB
As for the tariff impact, we feel at this juncture that our semi-consensus and below-trend GDP outlook of 1.2% growth this year and next (the 2026 outlook revised a notch lower but would have been more negative has it not been for a reassessment of sporting events which may boost headline GDP by over 0.3 ppt next year) – in other words sports adjusted GDP growth next year may be below 1% and some 0.5 ppt below potential.
But the irony is that while mortgage lending and house prices have started to rise afresh, banks seem reluctant to lend overall with private sector credit actually still slowing (Figure 1). Moreover, the updated inflation forecast from the quarterly assessment may add to clearly weak if not disinflationary price pressures, albeit where the SNB target being a less explicit sub-2% offers policy makers more flexibility. Though the medium-term forecasts in June were hardly changed, they still remain low with 2027 inflation at 0.7%, but where the SNB statement noted that these are consistent with price stability!
The SNB will also hope that the any threat of negative rates implicit in its inflation projections (as well as the effective 'stealth' negative rate as sight deposits held at the SNB will be remunerated at the SNB policy rate only up to a certain threshold) may be helpo restrain the CHF strength and perhaps also encourage banks to lend. But we still see rates staying at zero through to at least end-2026.