Economists expect the European Central Bank to raise interest rates again Thursday. That will keep pressure on the SNB to make another big move in December.
By hiking its benchmark interest rate in September, the Swiss National Bank (SNB) ended a phase of negative interest rates lasting almost eight years starting in December 2014. That was about a month before the minimum exchange rate of 1.20 francs to the euro was abandoned.
In recent years, the SNB Governing Board has established a reputation for surprising the markets with its policy decisions. The introduction and abandonment of the minimum exchange rate are one of the most striking examples of this.
The policy shift came in June in response to stubborn inflation, with a 50 basis points hike in the key interest rate that was not expected by the markets. The view in general was that the SNB would wait for the ECB to raise interest rates before tightening monetary policy itself. This was done in consideration of the Swiss franc-euro exchange rate. But the SNB preferred to accept a significant appreciation of the Swiss franc rather than a further acceleration of inflation.
Franc Appreciation
The reasons for the SNB's jumping the gun on the ECB from the market's point of seem fairly obvious. All it takes is a look at the monthly reports on consumer inflation from the Federal Statistics Office. Swiss consumer prices, most recently 3.3 percent on a year-over-year basis, stems largely from imports. While goods and services from abroad are 7.8 percent more expensive than a year ago, prices of domestic goods increased a far more modest 1.8 percent.
Producer price figures, which can portend pipeline inflation, also pointed to further price rises in Switzerland, with a 5.4 percent increase in the price level of the total supply of domestic and imported products.
In recent months, the strong Swiss franc acted as a barrier against inflationary pressures in Switzerland. While the euro was still trading at 1.04 Swiss francs at the beginning of the year, it fell to just over 0.94 Swiss francs at its low in September. That was a devaluation of around 9.5 percent. From this low, the euro has since recovered by around 5 percent against the franc.
Wage-Price Spiral
While inflation in Switzerland is above the SNB's inflation target of two percent, the ECB itself is under far greater pressure. In the eurozone, inflation most recently stood at 9.9 percent annually. In countries such as Germany, France, and Italy, the wage-price spiral is already twirling at full speed. With unemployment rates still comparatively low in most cases, high wage demands, and strikes are likely to have an upward impact on prices in the coming months, even if energy and electricity costs ease.
The members of the Governing Council around ECB President Christine Lagarde will have little choice but to raise interest rates again by at least 75 basis points. Another step is likely to follow the last meeting of the year in mid-December.
At its September meeting, the SNB did not rule out further interest rate increases to ensure price stability in the medium term. Given the price developments in Switzerland, the SNB will have little choice but to raise interest rates again by at least 50 or even 75 basis points in December. The interest rate differential with the eurozone cannot become too large, or the Swiss franc inflation barrier could instead become an open floodgate.
