Calls for an increase of the benchmark interest rates are still fresh in mind and already markets are bracing for yet another cut. Analysts are predicting that the next move will take monetary policy in Switzerland even further into negative territory.
Economists seem to agree that the Swiss National Bank (SNB) will keep rates steady at the monetary policy review on Thursday. They will keep a close eye on the wording that accompanies the decision to find out in what direction the monetary policy is heading.
Hopes that the bank will raise rates any time soon will be dashed, analysts expect. The Swiss central bank has kept the key interest rate at –0.75 percent for more than four years.
No Risk – No Return
The record low borrowing costs are widely credited with making life hard for banks and pension funds because they can’t generate a reasonable rate of return on investment by buying low-risk government bonds. Instead, asset managers have to take higher risks, investing a higher percentage of their money in equities.
Low borrowing costs have also fueled a persistent property boom in Switzerland, through the easy availability of cheap mortgages and also because institutional investors sought to buy into real estate because they promised a steady, albeit low return.
ECB: First Mover
Critics of the bank have argued that the SNB ought to have raised its key rate at a time when growth was above average and inflation stayed far below the 2 percent maximum it identifies as the maximum consistent with price stability. A move that would have given the bank more leeway to act in times of an economic downturn.
Instead, it now looks as if the next move will be a cut and not an increase. The economists of U.S. bank Morgan Stanley said it looked «increasingly likely that the SNB's next rate move may be downward».
The Swiss central bankers will likely become active after a move by the European Central Bank (ECB), because a loosening of monetary policy in the European Union has the potential to give the Swiss franc an unwelcome boost, which would make the deflationary scenario in Switzerland even more likely. As price stability is the bank’s central target for monetary policy, it would likely react to such a cut in the EU, which is Switzerland’s largest trading partner.
Risks to Stability and Growth
The eyes are firmly on economic growth. Even though the first quarter turned out positive in Switzerland, forward-looking data are skewed to the negative. Both the KOF and PMI readings are reflective of external downside risks, the Morgan Stanley economists said: «It’s not only trade tensions and global growth that are driving this; the potential feedback from related global market volatility into Swiss franc appreciation could also dent Swiss exports via reduced cost competitiveness.»
It looks as if the period of ultra-cheap borrowing costs will continue. Banks and pension funds won’t soon see an easing of their plight.
