Swiss Central Bank Hikes Rates
This morning the Swiss National Bank (SNB) further tightened monetary policy by moving the policy rate by 50bp from 1.00% to 1.50%.
This move was largely expected and priced in. However, it stressed that “It cannot be ruled out that additional rises in the SNB policy rate will be necessary to ensure price stability over the medium term.”
The SNB also confirmed that it is willing to be active in the foreign exchange market “as necessary” and has been selling foreign currency “for some quarters now….” Indeed, the SNB needs to use all its tools to achieve its price stability mandate.
However, it is reassuring that the press release mentions the recent Swiss banking sector stress and the measures taken by the federal government, FINMA1 (financial market regulator), and the SNB, which “…put a halt to the crisis.” But, of course, the US central bank should have done the same about the banking sector stress in the US, as we wrote earlier this week. But, unfortunately, it did not.
Regarding the inflation outlook, the SNB states, “Inflation has risen again since the beginning of the year and stood at 3.4% in February. It is therefore still clearly above the range the SNB equates with price stability. The latest rise in Inflation is principally due to higher prices for electricity, tourism services and food. However, price increases are now broad-based.”
When comparing the December 2022 vs. March 2023 inflation forecasts, the 2023 forecast has been adjusted higher from 2.4% to 2.6% and 2024 from 1.8% to 2.0%.
Whether in Switzerland, the US, or the EU, we continue to expect Inflation to remain problematic and central banks to continue tightening policy and once done, hold policy rates at higher levels for an extended period.
Market Implications
SNB’s actions and communication are clear and comprehensive. Today’s news suggests the SNB understands the Swiss economy’s challenges well. However, it is also clear that given that the Swiss economy is small and open, the SNB’s mandate for achieving price stability will be challenging.
The SNB press release mentions the global economy four times and the global financial sector thrice, both in a concerning manner; slowing global economy and that the global economy is subject to “significant risks, in particular, due to the recent turmoil in the global financial sector.”
The Swiss stock market is trading softer this morning. However, our focus on quality companies, an investment theme that we put in place in Q3 of 2021, remains in our view the appropriate strategy during these complex times. In addition, our Swiss-China connection strategy, which plays on the China growth outlook, is more robust than most other economies.
The Swiss Franc, CHF, is weaker on the day vs. a long list of currencies but flat vs. the EUR and the GBP. The CHF, however, is stronger vs. the USD by about 0.25%, as the USD fell vs. all major currencies on the back of the US monetary policy decision to hike rates by 25bp yesterday. Therefore, we expect the CHF to trade mixed. After strengthening for six consecutive quarters, from June 2021 to September 2022, CHF vs. the EUR will likely consolidate and trade sideways.
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