ING’s Senior Economist Charlotte de Montpellier notes that the Swiss National Bank kept its policy rate at 0% as low inflation and a strong Swiss Franc cushion higher energy prices. The SNB’s new projections show very weak inflation through 2027, reinforcing expectations of unchanged rates. ING argues that market pricing for a rate hike by year-end looks misplaced.

Strong franc keeps inflation pressures muted

"As expected, the Swiss National Bank decided to keep its policy rate unchanged at 0% at its March meeting. The low inflation environment, with year‑on‑year growth of the consumer price index of 0.1% in February, allows the SNB to be more relaxed regarding inflationary risks generated by rising energy prices."

"On the other hand – and above all – the appreciation of the Swiss franc in periods of uncertainty, due to its role as a safe haven, plays a central cushioning role. First, on energy prices themselves. The increase in Brent prices in dollars or gas prices in euros is less pronounced once converted into Swiss francs."

"These mechanisms were particularly visible during the 2022 energy shock, when the appreciation of the Swiss franc offset part of the rise in global inflationary pressures. As a result, headline inflation in Switzerland did not rise above 3.4% in 2022, whereas headline inflation reached a peak of 10.6% in the euro area and 9% in the United States."

"These extremely benign inflation prospects are, in our view, a rather “dovish” signal. With such inflation forecasts, the SNB is very clearly not considering having to raise rates in the coming months. This strongly confirms our forecast of unchanged rates over the coming quarters and indicates that the rate hike expected by the market by the end of the year appears very unlikely at this stage."

"In the coming months, we believe that the inflation differential between Switzerland and its trading partners will widen, as inflation is likely to rise much more in other countries following higher energy prices than in Switzerland. As a result, even if global uncertainty keeps the nominal value of the Swiss franc elevated in the coming months, real appreciation is likely to be more limited."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)