The SNB has started turning the page on negative interest rates

Central bankers have certainly been busy these past few days. The European Central Bank (ECB) got the ball rolling last week by announcing that it would start raising interest rates at its July meeting. Then yesterday, the US Federal Reserve upped the ante by lifting its policy rate by 75 basis points, a greater increase than expected. Now it appears the Swiss National Bank (SNB) also wants to join in on the global rush to tighten monetary policy. This morning it announced a half-point rise in its benchmark rate, bringing it from –0.75% to –0.25%. Message from our CIO, Daniel Varela.

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Benchmark rate: an unexpected decision

This came as a surprise to most market participants. This was not only because the rise was greater than expected – most economists had forecast an initial quarter-point rise – but mainly because it came much earlier than anticipated. The consensus was that the SNB wouldn’t take action until after the summer, or in any case until after the ECB’s initial rate hike. Swiss inflation is well below that of the eurozone, so it was thought that the SNB would probably lag behind the ECB in the tightening cycle. But this line of reasoning fails to take into account the independence that the SNB holds so dear. With this move, Switzerland’s central bank has distanced itself further from the approach adopted in recent decades by its US and eurozone peers. Both the Fed and the ECB attempt to guide investors as much as possible on upcoming changes to monetary policy.

Today’s surprise announcement by the SNB is yet another in a long list of decisions that have caught investors off-guard – the last one was in January 2015, when the central bank scrapped the floor on the EUR/CHF exchange rate. This morning, the SNB justified its rate hike by pointing to the country’s rampant inflation, which came in at 2.9% year on year in May. Inflation is mainly being fuelled by the war in Ukraine, and especially soaring energy costs.

"Inflation slipping in Switzerland"

But what also seems to be worrying SNB Chairman Thomas Jordan and his fellow Governing Board members are the possible second-round effects on the other goods and services making up the basket used to calculate inflation. One comment in particular stood out in Mr Jordan’s statement this morning. He doesn’t believe the Swiss franc is too strong, nor does he feel the currency has shielded the domestic economy from imported inflation. This is one way of indicating that the value of the Swiss franc is no longer a top priority for the SNB, and that it could tolerate a further appreciation in the currency. We still recommend largely hedging any euro exposure in portfolios whose base currency is the Swiss franc.

The SNB will undoubtedly keep lifting its benchmark rate in the coming months. This means the Swiss bond market could come under additional pressure from rising long-term yields. It’s too soon to start building up bond positions. Real-estate investments could also take another hit if the interest rates on mortgages keep climbing.


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