The global economic environment and inflationary pressure in Switzerland have weakened significantly recently. Another interest rate hike by the SNB is not necessary this month.
Until a few weeks ago, it seemed quite clear that the Swiss National Bank (SNB) would have to raise its policy rate to 2% at its next quarterly meeting on 21 September. Its last inflation forecast based on constant interest rates indicated a reading of over 2% in the medium term. Normally, this is a sure sign that monetary policy needs further tightening.
However, the global environment and the economic data in Switzerland have changed considerably since the last interest rate meeting, such that a rate hike is no longer necessary in our view: The economies of Switzerland’s most important trading partners are weakening. In the euro area, GDP is likely to decline in the third quarter, China is not providing any impetus and in the USA, there are also more signs of slowing economic momentum. We therefore do not consider an interest rate hike in September likely in any of these economic areas.
Inflationary pressure has also eased in Switzerland. The inflation rate has fallen to 1.6% in August, the core rate even to 1.5%. Producer prices are even lower than a year ago, which should lead to further declining consumer prices in the goods sector in the coming months.
Nor can there be any talk of widespread wage pressure. This is remarkable as the significant upward revision of the GDP data for 2022 and the first quarter of 2023 indicates that the Swiss economy has been operating at a much higher capacity than previously assumed.
Even without an additional interest rate hike, the monetary environment has already become more restrictive, as the trade-weighted exchange rate of the Swiss Franc has appreciated by another 2% since the last SNB meeting in July. This is increasingly reflected in the economic data. The Swiss economy has already stagnated in the second quarter. Whether it can expand in the third quarter in view of the weakness of its trading partners remains to be seen.
It is certainly foreseeable that inflation rates will not remain quite so low in the coming quarters. Rising rents and electricity prices are likely to push them back above 2% in early 2024. But these are external and transitory inflation drivers that cannot be combated with higher key interest rates.
The SNB must therefore think carefully about what it can achieve by paying even higher interest rates on the commercial banks’ already large deposits.
Apart from administered price increases, three factors determine future inflationary pressures: One, the capacity utilisation rate of the economy, two, exchange rate changes, and three, inflation expectations. None of these factors makes an interest rate hike necessary at present. Demand, and thus capacity utilisation, is already weakening. The exchange rate of the franc is over 4% more expensive than a year ago, even in real terms. And inflation expectations remain stable.
More effective than a hasty interest rate hike would therefore be to leave a warning that interest rates could rise further if any of the three factors do indicate more concrete inflationary pressures in the coming quarters than they have done so far. The costs of waiting are currently gratifyingly low.