“We are expecting a rate cut from the Swiss National Bank,” comments Martina Honegger-Romahn, lead portfolio manager fixed income Switzerland, ahead of the SNB’s monetary policy meeting, scheduled for June 20. While, she continues, the majority of central banks around the world are focused on fighting inflation, the SNB faces the opposite challenge: a low inflation outlook.
“Recent inflation stood at 1.4% year-on-year, which is higher than the recent inflation forecast of 1%. This could suggest keeping rates unchanged at the next Central Bank meeting “, adds Martina Honegger-Romahn.
However, 43% of inflation is explained by rising rental prices, in a context where landlords are only allowed to significantly increase rents if mortgage rates increase. Since the interest rate curve is significantly lower than last year, inflation from rising rental prices will disappear from the year-on-year Consumer Price Index (CPI) figures at the future. Thus, by removing rent inflation from the recent CPI, inflation of 1.4% is reduced to around 0.8%, suggesting an easing of monetary policy.
On the Swiss franc, Martina Honegger-Romahn explains: “the European Central Bank (ECB) wants to reduce interest rates, which will reduce the rate differential between the ECB and the SNB. This will put upward pressure on the Swiss franc, which is disinflationary.
“The SNB has limited room to reduce interest rates, as the policy rate is currently only 1.5% and the central bank is reluctant to return to a negative interest rate environment and /or increase its balance sheet Therefore, the most effective course of action is to take the lead in reducing interest rates and easing monetary conditions, which will likely lead to a devaluation of the Swiss franc.
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