SNB moves toward zero rates in battle with franc speculators

SNB Is Edging Toward Zero Rate in Tussle With Franc Speculators

2024-12-11 10:48:18 :

(Bloomberg) — Switzerland’s two-year run of positive interest rates is coming to an end, with the Swiss central bank likely to move this week to cut borrowing costs.

The Swiss National Bank is widely expected to cut its benchmark interest rate by 25 basis points to 0.75%, which would put policymakers just three steps away from zero interest rates. They take action every three months and are likely to achieve this goal by 2025 unless they shift to a slower pace of easing.

A handful of economists expect a larger half-percentage-point move on Thursday to help growth and curb speculation in the Swiss franc, and some traders are also betting on that outcome.

Either way, the decision will deplete precious ammunition for the SNB, which already has one of the lowest interest rates in the world, and show how stuck Swiss policymakers are as they try to prevent inflation from falling below 0.7%. Dilemma, inflation is close to its lowest levels. target range.

If pressure on the Swiss franc does not ultimately subside, officials may face tough tactical choices. They may need to consider expanding their balance sheets through monetary intervention, which could anger the incoming US administration of Donald Trump and could even send borrowing costs back into negative territory with associated side effects on the financial system.

“European economic growth is weak and a trade war may be coming,” said Nadia Gharbi, an economist at Banque Pictet & Cie SA in Geneva. “Negative interest rates cannot be ruled out.”

What Bloomberg Economics Says…

“The SNB’s three rate-setters will find themselves in a difficult position when they meet on December 12: Inflation is lower than expected, the economy is slowing, the Swiss franc is strong and there is limited room for rate cuts. What does it add up to? More rate cuts , but it will probably still be gradual.”

—Maeva Cousin, senior economist. For her SNB preview, click here

Martin Schlegel, who will preside over his first decision as SNB president this week, is facing a new era of speculation in the Swiss franc after a hiatus during the recent global inflation shock.

Pressure for the yuan to appreciate has intensified over the past year as markets view the yuan as a safe haven in times of geopolitical stress. Government crises in Paris and Berlin have boosted sentiment there, while the resilience of the Swiss economy has also supported sentiment there.

Last month, the Swiss franc hit its highest level against the euro in nearly a decade. In September, the RMB exchange rate against the U.S. dollar was close to its highest level for the same period, but has since weakened.

Traders are divided on its outlook, with major banks and investors including JPMorgan Chase & Co., Citigroup Inc. and Pictet Asset Management betting global trade tensions will spur demand for the currency, defying market consensus for a devaluation.

Against this backdrop, economists are also divided over the extent to which the SNB needs to respond to boosting inflation, which is eroded by lower import prices due to a stronger currency.

Pictet’s Gharbi is one of a handful of forecasters, including peers at Goldman Sachs Group Inc., Barclays PLC and J Safra Sarasin Ltd., who believe the SNB will cut interest rates to zero sometime in 2025, in line with financial markets.

“Such forecasts reflect a relatively pessimistic view of Switzerland’s economic momentum next year,” said Maxime Botteron, economist at UBS Group AG. “But if growth slows, we can Cut interest rates to zero soon.”

He and most other economists surveyed by Bloomberg now predict the central bank will pause after cutting interest rates by a further 25 basis points to 0.5% in March.

Five of 23 forecasters polled by Bloomberg said the SNB may have reached that level this week. Galbi wasn’t one of them, but she saw the possibility.

“This is a close call – the risk is tilted toward deeper cuts,” she said. “Market pricing puts pressure on the SNB to do more.”

UBS’s Botteron said currency traders “definitely” realize the SNB has less room to ease than other central banks. This in itself may increase appreciation pressure on the Swiss franc.

Complicating the central bank’s task is the prospect of other downward forces weighing on inflation. The government said it will conduct annual electricity price adjustments in January, with an average price cut of 10%. Additionally, there may be widespread rent reductions later this year.

Schlegel said the SNB’s regime allowed it to tolerate negative inflation for some time. But he has also repeatedly said officials are prepared to cut interest rates below zero if necessary and revisit the situation Switzerland has experienced for nearly eight years until 2022.

Many economists still believe the bar for taking such a step is high and that officials would first resort to previous large-scale foreign exchange intervention policies.

The use of such measures led to Switzerland being labeled a currency manipulator during Trump’s last term in office. Interventions also expose central banks to domestic political pressure as they expand their already large balance sheets, potentially leading to huge losses.

For officials, it’s still the lesser of two evils compared to negative rates, said Mirabeau chief economist Gro Jung. He said Schlegel’s threats should be taken with a grain of salt.

“He is the president of the Swiss National Bank,” Jung said. “He can’t just say ‘No, I don’t believe that.'”

–With assistance from Harumi Ichikura and Joel Rinneby.

More stories like this can be found at Bloomberg.com

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