Swiss Franc Falls after SNB Signals Interest Rate Cycle Nearing End 

"It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term. To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary," - SNB. 

Image © SNB

Switzerland's Franc fell on Thursday after the Swiss National Bank (SNB) raised its interest rate for a second occasion but signaled through its forecasts for inflation that further increases shouldn't be taken for granted. 

The Swiss Franc fell by more than half a percent against a broadly stronger U.S. Dollar while also easing lower against many other currencies after the SNB raised its cash rate from -0.25% to 0.5% in a monetary policy decision echoing that made by the Federal Reserve on Wednesday.

"It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term. To provide appropriate monetary conditions, the SNB is also willing to be active in the foreign exchange market as necessary," the SNB said in its statement. 

"At the end of the forecast horizon, inflation stands at 2%. The new forecast puts average annual inflation at 3% for 2022, 2.4% for 2023 and 1.7% for 2024 (cf. table 1). Without today’s SNB policy rate increase, the inflation forecast would be significantly higher," the SNB also said. 

Above: USD/CHF shown at 15-minute intervals alongside GBP/CHF. 

While Switzerland's central bank did not rule out any further increases in its interest rate, September's updated forecasts suggested that with the two increases in borrowing costs announced so far the Swiss inflation rate would be likely to fall back to, if not below 2% at the end of the forecast horizon. 

This is, implicitly, an indication of Swiss policymakers thinking they may already have done enough to return inflation back to their definition of price stability. 

"The SNB equates price stability with a rise in the Swiss consumer price index (CPI) of less than 2% per annum. Deflation, i.e. a sustained decrease in the price level, also breaches the objective of price stability. With this definition, the SNB takes into consideration the fact that inflation cannot be steered with pinpoint accuracy, or measured precisely," the bank explains on its website. 

To the extent that the above is correct it would suggest there are few, if any further interest rate rises left to come from the SNB, although that would not necessarily mean the Swiss Franc is set to continue falling.

This is in part because the SNB has stated that it would use its large foreign exchange reserves in order to maintain price stability, and these were valued at CHF 884.38BN (£803.98BN) at the end of the second quarter.

That means there would be a risk of the SNB selling foreign currencies and buying Francs in the event of any persistent losses in Swiss exchange rates.

Above: USD/CHF shown at daily intervals alongside GBP/CHF. 

"We think the SNB is managing EUR/CHF lower and if there is any spike in EUR/CHF back to 0.9550 today, we expect it to be sold into," says Chris Turner, global head of markets and regional head of research for UK & CEE at ING. 

It's possible, though by no means assured, that any buying or selling would involve currencies of trade partner economies where inflation is very high. 

Such currencies would potentially include Dollars, Pounds and Euros as these are all large holdings within the SNB reserve portfolio and the U.S., UK and European economies all have inflation rates that are sat at multiples of their respective central bank targets. 

"Inflation will remain elevated for the time being. However, the importance of temporary factors such as supply bottlenecks is likely to diminish over the medium term. The increasingly tighter monetary policy in many countries should also help inflation gradually return to more moderate levels," the SNB said.

"The further development of the economy is likely to be shaped by the economic slowdown abroad and the availability of energy in Switzerland. To date, the prices of natural gas and electricity in particular have risen sharply. For this year, the SNB anticipates GDP growth of around 2%," the bank also said.

Source: Swiss National Bank.