(Bloomberg) -- Switzerland’s two-year stint of positive interest rates is about to inch closer to a potential end with the central bank’s likely move to cut borrowing costs this week.
A widely predicted quarter-point reduction in the Swiss National Bank’s benchmark to 0.75% would bring policymakers just three such steps away from zero. Acting once every three months, they might well get there in the course of 2025 unless they switch to a slower pace of easing.
A small minority of economists anticipates an even bigger half-point step on Thursday to aid economic growth and stem speculation in the franc, and some traders are betting on that outcome too.
Either way, the decision will use up precious ammunition for a central bank whose rate is already one of the world’s lowest, showcasing the quandary for Swiss policymakers trying to prevent an undershoot of inflation that, at 0.7%, is already nearing the floor of their target range.
If pressure on the franc doesn’t ultimately subside, officials could face tough tactical choices. They might need to contemplate bloating their balance sheet with currency interventions that risk the ire of the incoming US administration of Donald Trump, or even returning to negative borrowing costs, with associated side effects on the financial system.
“There’s weak growth in Europe and possibly a trade war coming,” said Nadia Gharbi, an economist at Banque Pictet & Cie SA in Geneva. “Negative rates can’t be ruled out.”
What Bloomberg Economics Says...
“The three rate setters of the SNB will find themselves in a tight spot when they meet on Dec. 12: inflation is undershooting, the economy is slowing, the Swiss franc is strong and, room to cut interest rates is limited. What does it add up to? More rate cuts, but they will likely remain gradual.”
—Maeva Cousin, senior economist. For her SNB PREVIEW, click here
Martin Schlegel, who will chair his first decision as SNB president this week, is confronting a new era of speculation in the franc after a hiatus during the recent global inflation shock.
Upward pressure on the currency has intensified in the past year, driven by the market’s view of it as a haven at times of geopolitical stress. Government crises in Paris and Berlin have fed sentiment there, underpinned by the resilience of Switzerland’s economy.
Against the euro, the franc reached its highest in almost a decade last month. In September, it touched close to the strongest level against the dollar within that time period, though it has since weakened.
Traders are split on its prospects, with big banks and investors including JPMorgan Chase & Co., Citigroup Inc. and Pictet Asset Management bullish on the view that global trade tensions will fuel demand for the currency, in defiance of a market consensus for weakening.
Given that backdrop, economists also diverge on how far the SNB will need to respond to shore up inflation, which gets eroded by the strength of the currency making imports cheaper.
Gharbi at Pictet is in a minority of forecasters including peers at Goldman Sachs Group Inc., Barclays Plc and Bank J Safra Sarasin Ltd who reckon the SNB will get its rate down to zero some time in 2025, chiming with the view of financial markets.
“Such predictions reflect a relatively pessimistic view of Swiss economic momentum for next year,” said Maxime Botteron, an economist at UBS Group AG. “But if growth slows, we can be pretty quickly at an interest rate of zero.”
He and most other economists surveyed by Bloomberg currently predict the central bank will pause after a further quarter-point cut to 0.5% in March.
Five out of 23 forecasters surveyed by Bloomberg reckon the SNB could already reach that level this week. Gharbi isn’t one of them, but she sees the possibility.
“It’s a close call — risks are tilted to a larger cut,” she said. “Market pricing puts some pressure on the SNB to do more.”
According to Botteron at UBS, currency traders “certainly” realize that the SNB has less easing space than other central banks. That in itself could increase upward pressure on the franc.
Complicating the central bank’s task is the prospect of other downward forces weighing on inflation. January will see annual electricity price adjustments featuring average price cuts of 10%, according to the government. In addition, there’s the possibility of widespread rent reductions later in the year.
Schlegel has said that the SNB’s regime allows it to tolerate negative inflation for some time. But he has also repeatedly noted that officials are prepared to take rates below zero if needed, revisiting conditions that Switzerland experienced for almost eight years until 2022.
Many economists still see a high bar before such a step, and that officials would first resort to its prior policy of largescale foreign-exchange interventions.
Use of such measures led to Switzerland being branded a currency manipulator when Trump was last in power. Interventions also expose the central bank to domestic political pressure, as they swell its already outsized balance sheet, which can lead to large losses.
For officials, that’s still the lesser evil compared with negative rates, according to Gero Jung, chief economist at Mirabaud, who said Schlegel’s threat should be taken with a pinch of salt.
“He’s the SNB president,” said Jung. “He can’t just say ‘no, I don’t believe in that.’”
--With assistance from Harumi Ichikura and Joel Rinneby.
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