We know when the SNB should lower its key rate

After the European Central Bank, will the Swiss National Bank also lower its key rate? According to several experts, it is likely yes.

Niklaus Vontobel / ch media

Last week, the European Central Bank (ECB) announced a cut in the key rate. This is the first time such a measure has been taken since Europe was engulfed by a wave of inflation. However, this is only a drop of a quarter of a percentage point, and Christine Lagarde has given no indication of how this might continue.

We therefore do not know whether we will remain with this single reduction in interest rates – or whether a downward turnaround has begun and whether the ECB will further lower its key rate. The uncertainty regarding the consequences for Switzerland is great. The Swiss National Bank (SNB) will take a new decision on its key rate on June 20.

Samad Sarferaz, expert from the Center for Economic Research (KOF) of the ETH Zurich, spoke on these questions in an internal publication. According to him, inflation is clearly within the SNB’s target zone, and the KOF does not expect a further rise in its forecasts:

This argues in favor of a further reduction in interest rates. Indeed, such a decision is only possible if inflation is overcome. The SNB is apparently confident on this subject and has therefore already lowered its key rate for the first time in March, to 1.5%.

The euro immediately strengthened against the Swiss franc and temporarily approached parity. The link is therefore confirmed: if the key rate of the SNB is significantly lower than that of the ECB, the franc weakens and the situation becomes dangerous. Swiss imports are becoming more expensive and prices are increasing in our country, which fuels inflation.

But the ECB’s recent drop in interest rates limits this risk. Moreover, the euro had already weakened before, when the markets started betting on a reduction in interest rates from the ECB. Now that this bet has worked, the euro weakened further and fell below 97 cents.

The probability that the SNB will lower its key rate once again has therefore increased. Because, as KOF expert Samad Sarferaz notes:

In other words, the ECB’s decision increased the chances that the SNB will lower its key rate again on June 20, bringing it down to 1.25%.

Recent increase in inflation

But this does not mean that the SNB will use this greater room for maneuver. Indeed, inflation has recently become higher again in Switzerland. In May, the consumer price index was 1.4% higher than the previous year. In March, the last time the SNB decided to cut rates, it was only 1%. This is undoubtedly one of the reasons why there is currently great uncertainty in the financial markets: many investors do not believe that a second decline of the key rate will take place in June.

On the other hand, the economists at Bank J. Safra Sarasin are convinced of this. In a press release, they write:

Indeed, inflation is still within the fluctuation range of the SNB and therefore does not constitute a danger. On the other hand, there is a great risk that the economy will suffer too much, as experts point out. Growth has been weak of late – and will continue to be so according to leading indicators. The outlook for Switzerland is therefore even worse than for the euro zone, which itself is only moving forward with difficulty.

The Fed could act too late

In the United States, the central bank, the Fed, will decide this week on its key rate; but few observers expect a decline. This does not please experts, who have long considered that inflation has been defeated. Their warnings are becoming more and more glaring.

Nobel Prize winner Paul Krugman, for example, wrote in the New York Times thatit’s time to stop obsessively worrying about inflation, “which looks more and more like a problem from yesterday”.

If we consider different calculation methods, inflation would be between 2 and 3% and would therefore be higher than the official target, but not to the point of being a major concern. On the other hand, there are worrying signs that high interest rates could have a greater impact on the economy, with some lag. Paul Krugman’s intuition is therefore as follows:

Translated and adapted by Tanja Maeder