©Reuters. FILE PHOTO: The Swiss National Bank (SNB) building near the Limmat river in Zurich, Switzerland, March 23, 2023. REUTERS/Denis Balibouse/File Photo
By Indradip Ghosh
BENGALURU (Reuters) – The Swiss National Bank will wait until at least June before cutting interest rates, according to a strong majority of economists polled by Reuters who say it will make shallower cuts than its peers this year.
The SNB may choose to wait on the sidelines until the U.S. Federal Reserve and European Central Bank begin cutting interest rates, widely expected in June, to prevent further weakness in the Swiss franc.
A falling franc carries the risk of a flare-up in inflation, which fell to a nearly 2-1/2-year low of 1.2% in February and is within the central bank’s target of 0%-2%. from May 2023.
In December, the SNB said it would no longer focus on foreign currency sales to support the franc as a measure to dampen imported inflation, while SNB President Thomas Jordan said this was no longer necessary.
Jordan recently announced his decision to step down in September.
The franc has slipped about 3.5% this year and some say an unexpected rate cut before that of other major central banks could weaken it further.
A majority of nearly 80%, 25 out of 32 economists in the March 13-18 Reuters poll, expected the SNB to keep the key rate unchanged at 1.75% – the lowest among the central banks of the countries in the G10 other than the Bank of Japan – March 21.
“There are several reasons to cut rates in June and keep rates unchanged in March. The Swiss franc has depreciated slightly against the dollar and the euro since the beginning of the year… The SNB is not sure whether there will they are second-round effects,” said Alessandro Bee, an economist at UBS.
The survey result was in line with the market’s assessment for the first rate cut, which only recently changed to June from March, following a similar move earlier this year on expectations for the first cuts of rates by the Fed and the ECB.
However, there has been no clear consensus among economists regarding the exact timing of the first cut. While 14 predicted this would happen in June, 11 expected the first reduction in the third quarter or later. Only seven said the SNB would cut on Thursday.
“They will be cautious about cutting rates in a situation where they can’t be sure whether the ECB and the Fed will follow them,” said UBS’s Bee. “There is still a possibility that the Fed and ECB will keep rates unchanged for longer.”
But Switzerland also has a very low inflation rate, much lower than that of the United States or the eurozone.
“We have long predicted that inflation would fall close to 1% early this year and that the SNB would cut rates in March. And since our non-consensus inflation forecasts have largely come to fruition, we believe that it is likely that the SNB will proceed with a rate cut (on March 21),” wrote Adrian Prettejohn, European economist at Capital Economics.
The SNB will cut interest rates by a total of 50 basis points this year to 1.25%, according to survey medians. If realized, this would be less than the 75-100 basis point rate cuts expected by the Fed and ECB.
Inflation is expected to average 1.5% this year, before falling to 1.3% in 2025 and 2026, according to the Reuters poll.
“We maintain our call to the SNB for a longer pause followed by a slower/late cut cycle than the ECB,” noted Chiara Angeloni, European economist at Bank of America.
“If domestic inflation turns out to be stronger than the SNB thinks… we would expect the SNB to offer tighter financial conditions through exchange rate appreciation – thus rebalancing the balance of foreign assets – rather than higher rates. “
Asked about the biggest risk from the size of rate cuts this year, a small majority of economists, 10 of 18, said it could be lower than expected and eight said it could be higher.
(For more stories from Reuters Global Economic Poll 🙂