SNB Is About to Reveal Its Resolve on Franc Strength

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In tune with that, the central bank’s forecast for consumer-price growth is set to stay largely the same, possibly with energy costs prompting a small correction to the upside over the next quarters.

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What Bloomberg Economics Says:

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“The Swiss franc remains substantially overvalued, according to Bloomberg Intelligence. This appreciation reflects mainly domestic and idiosyncratic factors. That should, all else equal, increase the effectiveness of intervention.

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—Jean Dalbard, economist. For his SNB PREVIEW, click here

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As the projection reflects policymakers’ views — the SNB has publicly called it part of its “communication materials” — the end point in 2028 will attract particular attention. A higher estimate than that given in December — 0.8% — could stoke expectations of eventual rate hikes.

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The currency is likely to remain the key focus of policymakers for now, given that franc strength tends to depress inflation via lower import costs. It has reconciled that approach with US officials monitoring for manipulation. 

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In the central bank’s annual report released on Tuesday, it said a joint statement released with the US Treasury last year “confirms” that interventions “are an important monetary policy instrument for the SNB in the fulfillment of its mandate to ensure price stability.”

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Some observers say there’s even a case to allow for a stronger franc at present, since it might exert a brake on inflation getting out of control.

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“You almost want a positive currency right now to limit the pass-through risk, you know, from higher external energy prices,” Geoffrey Yu, senior market strategist at BNY, told Bloomberg Television. “I think their tolerance for a stronger franc is going to be stronger.”

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As for the policy outlook, traders are pricing in higher Swiss borrowing costs already this year. Economists don’t see that transpiring before 2028.

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“Hikes are expected in the global interest rate structure, and the Swiss market cannot completely decouple itself from this,” said Philipp Burckhardt, strategist at Lombard Odier Investment Managers in Zurich. “And there is little liquidity in the Swiss franc market.”

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Then again, the SNB’s fearless attitude to shocking investors on prior occasions means a cut into negative territory can never be excluded, even if it’s deemed unlikely at present and would irk consumers.

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Such a move would probably take shape with a jumbo half-point cut to maximize the step’s effect, according to multiple economists.

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“If it makes sense, then they will do it, regardless of what the public thinks,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “The SNB has repeatedly shown that it doesn’t hesitate to make unpopular decisions.”

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—With assistance from Naomi Tajitsu, Lizzy Burden and Tom Mackenzie.

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