The Swiss National Bank is widely expected to raise its benchmark rate by 50 basis points Thursday. But the more pressing question is what comes next.

At its last meeting, the Swiss National Bank (SNB) increased its policy rate by 75 basis points to 0.50 percent and ended its period of negative interest rates to counter inflationary pressures. 

Except for an upward blip in August, headline annual inflation has been coming down steadily, from 3.4 percent in June to the most recent reading of 3.0 for October and November. Moreover, core consumer price indexes which exclude seasonal products, and energy rose less than two percent annually in November, up 1.9 percent. That will take some of the pressure off the SNB for another 75 basis point hike, with the most likely scenario for a 50 basis point increase.

At its June meeting, the SNB also forecast inflation abating in the next two years, from 3.0 percent this year to 2.4 percent next year and 1.7 percent in 2024. Given those expectations, why should the SNB undertake additional rate hikes? For one, a 0.5 percent rate is still historically low. Another consideration is administered prices which account for around 30 percent of Swiss inflation. 

Administered Prices

In times of higher inflation, administered prices help to act as a brake on overall inflation. However, when headline inflation starts abating, administered prices can remain elevated. Since June, administered price increases have doubled from 0.9 annually to 1.8 percent in both October and November, according to data from the Federal Statistics Office. 

Risk of Overtightening

Given these prices tend to lag broader price pressures, this is one thing the SNB is likely to keep an eye on should they persist. One scenario is that after a 50 basis point hike on Thursday, the SNB either pauses or conducts a series of smaller hikes in 25 basis point increments. 

In a conversation with finews.com, EFG Senior economist Gianluigi Mandruzzato underscores this, saying «after the unusually fast interest rate increases at the last two meetings, it seems appropriate to slow down and observe the effects of past tightening. Such a tactic would reduce the risk of overtightening.»

Threading the Needle

Another consideration at play is the economy, for which a group of federal experts on business cycles lowered their forecasts.  This year, they expect annual GDP growth of 2.0 percent, a downgrade from their 2.6 percent forecast in June. Next year, they expect economic growth of 1.1 percent which is also a downward revision from 1.9 percent growth. 

The experts cite the challenging international environment as likely exerting increasing pressure on the more cyclical segments of export-oriented industries, which is similar to what the SNB said in its September assessment. Despite these developments, the Swiss labor market «remained positive,» the central bank said. 

These factors also speak to the danger of overtightening and choking off economic growth even more.

Credit Suisse economist Maxime Botteron sees the SNB taking a more cautious approach. «Overall, we still believe that the inflation outlook warrants a tighter monetary policy, but there is no need for large policy rate hikes in our view,» he wrote Monday. The SNB will raise the rate by 25 basis points Thursday, and another 25 in March, taking the policy rate to 1.0 percent. 

Exchange Rates

In its March assessment, the SNB said the «Swiss franc remains highly valued,» language that it dropped in both its June and September assessments. 

The franc is currently not seen as overvalued by the SNB even though it has appreciated against the dollar and euro recently. It is likely to welcome a further modest appreciation which will help to combat inflation without the central bank having to resort to more drastic interest rate hikes. It would be notable if the SNB reintroduces the «highly valued» language. 

Through the first three quarters of the year, the Swiss National Bank (SNB) reported a loss of 142.4 billion Swiss francs ($145.4 billion), according to a statement from the SNB at the end of October. During the same period last year, it reported a 41.4 billion profit. The bulk of the losses came from the SNB's foreign currency positions which suffered losses of 141 billion francs.

Balance Sheet

Another way the SNB can tighten its policy without raising interest rates is by unwinding its balance sheet of the asset purchases it has made. For the time being this doesn't seem to be at the top of the SNB's to-do list, but it will also be worth a close look at the assessment to see if this is an issue they address. 

Overall, the SNB has the flexibility on how it can address myriad challenges facing it. In any case, banks and wealth managers at the very least have certainly welcomed the end of negative interest rates. Now, where do we go from here?