SNB Rate Cliffhanger Will Be Thomas Jordan’s Farewell

(Bloomberg) — Thomas Jordan’s final interest-rate decision as Swiss National Bank president is laden with suspense and could surprise investors — much like other pivotal moments during his tenure.

A week after the Federal Reserve’s half-point cut in borrowing costs, financial markets are speculating that officials in Zurich on Thursday might follow their Washington peers with a move of the same size.

Meanwhile only one of the 32 economists surveyed by Bloomberg fully anticipate such a reduction, even if several acknowledge the possibility. Two predict no change, while the rest expect a quarter-point cut to 1%.

Such a three-way cliffhanger marks a fitting finale for a central bank chief who, during almost 13 years in office, has frequently kept investors on their toes or even jolted them unexpectedly. Just during this cycle, the SNB’s decision to begin raising rates, to stop doing so and then to start easing were characterized by surprises.

The suspense this time round reflects the trade-off confronting policymakers at a time when their peers in Sweden have already shifted toward signaling a possible half-point reduction. On the one hand, the franc’s strength, momentum in global easing, and noticeably weakening inflation might speak for a big rate cut. But any such move depletes the SNB’s ammunition to defend the currency in future.

“There is a huge gap between market expectations and economists’ expectations,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “Still, the main thing is the realization that inflation has fallen far too low in recent months. We have significantly lower price pressures than the SNB expected – and officials have to react.”

The decision takes on greater tension and poignancy given the exit of 61-year-old Jordan on Sept. 30, to be succeeded by his deputy, Martin Schlegel. This is the last act of one of the remaining veterans of the global financial crisis and its low-rate aftermath.

From the SNB’s decision to abandon its cap on the franc in early 2015, rocking global markets, to its half-point rate hike in 2022 and its surprise reduction in March this year, Jordan’s era has featured both periods of prolonged inertia, and abrupt shifts.

A 50 basis-point move would be one of the latter — reminiscent even of how his former contemporary, Mark Carney, ended his own stint at the helm of the Bank of England in March 2020 just days after an emergency cut of that exact size.  

The case for doing so is the slowdown of Swiss price growth toward levels alarmingly close to the feeble pressures that troubled Jordan and his colleagues in the decade through 2021.

Inflation last month weakened to 1.1%, far below the SNB’s estimate of 1.5% for the third quarter. Switzerland’s government expects it to drop to 0.7% next year, closing in on the lower bound of SNB’s 0-2% target range. 

The strength of the franc, depressing the cost of imported goods, might exacerbate that momentum. The currency recently approached the all-time high it reached against the euro in January, despite two rate cuts since then. Two Swiss business lobbies have even urged central-bank intervention to stem the gains.

The SNB has ignored such pleas in the past, and is likely to do so again. Moreover, adjusted for inflation, the franc’s real exchange rate — policymakers’ favored gauge — hasn’t seen such appreciation, suggesting that the strong currency is maybe a bigger worry for companies than for policymakers, for now.

The economy itself is offering mixed signals. Industrial activity has been subdued for a while, and exporters worry that Switzerland’s main trading partners in Europe are struggling, along with China. But the services sector helped sustain stronger-than-expected growth in the second quarter.

“The readings of purchasing managers’ indices in the eurozone are very bad, which raises the likelihood of a Swiss half-point cut,” said Gero Jung, chief economist of Mirabaud Asset Management in Geneva. “Still, 25 basis points remain our base scenario.”

To be sure, the global backdrop isn’t materially worsening, according to the OECD, which released new forecasts on Wednesday that were largely unchanged for the US, euro zone and China.

Marc Bruetsch, chief economist of Swiss Life, is one of two forecasters who even reckon SNB officials will be persuaded to stay on hold. He says the economy “doesn’t fare too badly” at present.

The case to at least move more gradually is that, with its rate currently at 1.25%, Swiss officials don’t have much space before they reach zero. 

“It’s in the interests of the SNB to hold back some ammunition,” said Sebastien Gyger, chief investment officer of Banque Cantonale Vaudoise in Lausanne. “Central banks will try to refrain from going negative again if they can.”

Whatever the outcome, Bruetsch at Swiss Life reckons it will be determined by the best judgment on the tradeoffs facing the SNB, rather than any desire on Jordan’s part to go out with a bang.

“That’s not Swiss,” he said.

(Updates with OECD in 16th paragraph)

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