The Swiss National Bank unexpectedly left its benchmark rate unchanged on Thursday, as policymakers assessed that the significant tightening of policy over the past five consecutive meetings is countering inflationary pressure, though the bank left the door open for future hikes.
The SNB Governing Board, chaired by Thomas Jordan, decided to hold the policy rate at 1.75 percent, while markets expected a final quarter-point hike.
The central bank said it cannot be ruled out that a further tightening of monetary policy may become necessary to ensure price stability over the medium term. The bank said it will monitor the development of inflation closely in the coming months.
Underlying inflationary pressures have eased somewhat, while monetary conditions have tightened again due to the appreciation of the Swiss franc since the June policy session, Jordan observed.
“This situation allows us to wait for now and review at the next monetary policy assessment whether the monetary policy measures we have taken to date are sufficient to keep inflation within the price stability range on a sustainable basis,” Jordan added.
Further, the latest decision also considers the uncertainty about how strongly the monetary tightening to date will further weaken inflation, the SNB chief said.
The SNB announcement came after the US Federal Reserve skipped a rate hike on Wednesday. The Fed left the target range for the federal funds rate unchanged at 5.25-5.5 percent.
The bank reiterated that it is willing to be active in the foreign exchange market as necessary. In the current situation, the bank said it is focused on selling foreign currency.
Sight deposits held at the central bank will continue to be remunerated at the SNB policy rate of 1.75 percent up to a certain threshold, the bank said. Deposits above this threshold will be remunerated at an interest rate of 1.25 percent.
Inflation slowed to 1.6 percent in August, reflecting slower increase in prices of imported goods and services.
Inflation outlook for 2023 and 2024 was retained at 2.2 percent, while the bank downgraded its forecast for 2025 to 1.9 percent from 2.1 percent.
Further, the bank observed that subdued global demand and the loss of purchasing power due to inflation and restrictive financing conditions are dampening the Swiss economic growth.
The bank forecast the economic growth to remain weak for the rest of the year. GDP growth is seen at around 1 percent this year, which was unchanged from the previous projection.
The SNB cautioned that although the momentum on the mortgage and real estate markets has weakened noticeably in recent quarters, the vulnerabilities in these markets remain.
The bank said it will in future be able to provide liquidity against mortgages as collateral to all banks in Switzerland that have made the requisite preparations. This facility, launched in 2019, was earlier extended to only systemically important banks.
Mortgages are by far the most significant illiquid balance sheet item in the banking system and account for around 85 percent of domestic credit volume, SNB Governing Board Vice Chairman Martin Schlegel said.
Capital Economics’ economist Adrian Prettejohn said any further increase in the policy rate is unlikely as inflation is set to fall next year. As a result, the SNB is expected to actually start cutting rates next year.
The overall message is rather dovish and if the economic outlook continues to deteriorate over the next few months, it is likely that today’s pause will extend into December and 2024, economists at ING said.
“A further rate hike in December cannot be ruled out, but at this stage the most likely outcome is that the rate hike cycle effectively ended in June and that the rate will be maintained at 1.75 percent for the next few years,” they added.
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