SNB chairman Thomas Jordan last week said that the strong franc was not making things easier for the Swiss economy. And when you hear comments like that, it stands to reason that the central bank is watching things closely and might plot their next move based on how they would want to narrate the direction of the currency.
When the SNB was hiking rates previously, they needed a stronger franc to counteract imported inflation. The fear then was not to let inflation get out of control. And to their credit, they did their part.
Swiss inflation didn’t get too high and was quickly brought back down as the SNB’s monetary policy transmission kicked into gear.
But the string of lower inflation data as of late has revealed one thing at least. And that is imported inflation is no longer the problem for the SNB. In fact, it’s rather the opposite. The report today showed services inflation at 2.2% but the headline reading was 1.1% with core inflation at 1.3%.
Imported inflation is now, and have been for a while, contributing negatively to price pressures. That’s a product of a stronger currency and it provides some idea of the franc’s standing at the moment. For some context, EUR/CHF touched a record low in August and is still less than 200 pips from that now.
Taking all that into consideration, they have just about the right reason to try and step into the market again. They have the tools to do so but a better way would be to also utilise monetary policy settings. So, are we on for a 50 bps rate cut to weaken the franc? It is certainly a consideration. That especially as markets still have some ways in fully pricing that in.