(Bloomberg) -- The Swiss franc’s rally to the strongest level in almost a decade has raised the prospect of the first large interest rate cut by a major central bank this year.
While economists forecast the Swiss National Bank will lower rates by another quarter point cut when it next meets on Sept. 26, the probability of half-point reduction has been rising steadily. Market pricing now implies a roughly one-in-three chance, up from zero just a month ago.
The franc’s advance is cramping exports and lowering the price of imports at a time when inflation is already well within the SNB’s target — and near a three-year low. Currency strategists at MUFG Bank Ltd., UBS Group AG and Bank of America Corp. say to stem further currency gains, policymakers should take more forceful action.
“They’re not afraid to surprise the markets,” said Derek Halpenny, head of FX research at MUFG Bank. “And to shake FX, it’s probably what’s needed.”
The SNB is due to set policy a week after the Federal Reserve’s September meeting. While the market sees a roughly 20% chance of half-point reduction from the US central bank, the probability has been falling.
The franc has climbed about 6% against the dollar since early July. It trade 0.4% stronger at 0.8434 per dollar on Wednesday.
The advance comes as popular carry trades — funded by borrowing low-yielding currencies — started faltering, and as flows into haven assets picked up. Last month, it touched the strongest level against the euro since 2015.
Against this backdrop, Swiss exporters have urged the SNB to “act quickly” to stem the franc’s rise. They say the currency’s gains threaten a recovery in overseas sales.
The SNB largely refrained from intervening in the currency market in the first three months of the year. Quarterly intervention figures for the period of April to June will be released at the end of September.
“It will be difficult for the SNB to fight against the market,” said Yvan Berthoux, a FX strategist at UBS. He sees the risk of a half-point cut, even as the bank’s economists expect a smaller one.
Not everyone is convinced that policymakers need to deliver a large reduction.
A regular 25-basis-point cut combined with direct FX intervention “may be sufficient” to keep the franc from strengthening further, said Dominic Bunning, head of G-10 FX strategy at Nomura International Plc. He sees a low probability of a bigger cut.
The SNB kicked off monetary easing earlier than global peers and lowered rates at both of this year’s decisions, bringing its policy rate to 1.25%. Inflation has been within the central bank’s 0% to 2% target range for over a year now, ticking at 1.1% in August.
“Inflation is way too low in their case and they need the currency to weaken,” said Athanasios Vamvakidis, head of G-10 FX strategy at Bank of America. “I think they should do 50 basis points.”
--With assistance from Anchalee Worrachate.
(Updates with franc’s price in sixth paragraph.)
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