Renewed Franc Surge Could Make the SNB Consider More Rate Cuts

(Bloomberg) — A renewed surge in the franc is prompting economists to ask if the Swiss National Bank will need to prolong interest-rate cutting to keep such pressures at bay. 

Amid flows triggered by signs of a cooling global economy, its real effective exchange rate — a gauge officials often highlight — last week touched levels previously seen before they lowered borrowing costs last month.

That means the currency’s gains are persisting even when taking into account lower Swiss inflation, whose latest reading arrives this week. 

“We are back in an area where the franc is stronger in real terms than necessary,” said Karsten Junius, chief economist at Bank J Safra Sarasin Ltd in Zurich, who estimates that the real exchange rate is about 4% above its long-term average.

The SNB began its easing cycle in March before major peers such as the European Central Bank, and a third cut at its next meeting in September is a done deal for many observers. They diverge though on the policy path after that.

Most economists surveyed by Bloomberg reckon the SNB won’t reduce borrowing costs any further, while a small minority anticipate more cuts. Junius is predicts two moves in 2025, bringing the key rate down to 0.5%.

At Commerzbank AG, currency analyst Michael Pfister highlights how the franc is not only almost back to levels against the euro last seen before the June meeting, but is now even slightly stronger against the dollar.

“The SNB made it quite clear last month that they do not like levels that low, as they create disinflationary pressures,” he said. “If the CHF strength continues, I think the market will focus on the following meetings. Our base case is a cut in September and December.”

With Switzerland’s national day shutting business there on Thursday, the next focus for investors will be inflation numbers due on Friday. Most economists forecast it will stay at 1.3% for a second month, comfortably below the SNB’s 2% ceiling.

Economists reckon that the central bank will stick to using its interest rate to stem gains in the franc rather than reverting to its prior policy of market intervention, which bloated its balance sheet as officials bought up foreign currencies until 2022. 

While that remains an option, the SNB will only revert to that policy in the case of “more extreme overvaluations,” Junius said, since a renewed expansion of the balance sheet expansion risks hurting the central bank’s bottom line.

“It would be a bad deal,” he said. “And they do pay attention to that.”

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