Swiss Franc Slides on SNB Hike, But Don't Bet on a Lengthy Decline

Image © SNB

The Swiss National Bank raised interest rates, lifted its inflation forecasts and maintained a desire for a strong Swiss Franc in what amounts to a 'hawkish' June policy announcement.

The decision to hike by 25bp might have disappointed the market to the extent a 50bp was also a consideration and explains a slide in CHF, but further hikes and currency market intervention remains likely.

Analysts note this is a central bank that remains committed to fighting inflation by defending a stronger Franc, therefore any losses in the currency are likely to be limited.

"EUR/CHF has edged higher today after the SNB avoided the more aggressive 50bp rate hike option. However, this exchange rate remains heavily managed by the SNB and we doubt it will embark on a major rally just yet," says Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING Bank.

Euro-Franc rose to 0.9840, Dollar-Franc to 0.8944 and the Pound to Franc exchange rate rose a quarter per cent to 1.1435.

The SNB raised the policy rate by 0.25 basis points to 1.75%. "In doing so, it is countering inflationary pressure, which has increased again over the medium term," said the Bank in a statement.

Swiss inflation declined to 2.2% in May and is expected to slip to 1.7% in the autumn, suggesting the central bank has won the fight against inflation.

But the SNB made it clear inflation is set to remain above the 2.0% target over the medium term as it expected domestic inflationary pressures to build, suggesting it sees a need to maintain tighter monetary conditions.

It raised its inflation forecasts to 2.2% for 2023 and 2024, and 2.1% for 2025 as it expected ongoing second-round effects, higher electricity prices and rents, and more persistent inflationary pressure from abroad to make an impact.

Above: GBPCHF and EURCHF at daily intervals showing 2023's developments.

The central bank emphasised the importance of the Franc in "having a dampening effect" on inflation over the short term.

"The SNB continues to intervene in the foreign exchange market by selling currencies, thereby strengthening the Swiss franc and bringing down imported inflation. After years of foreign currency purchases, this reduces the size of the SNB's balance sheet and is therefore a particularly effective form of quantitative tightening against inflation," says Charlotte de Montpellier, Senior Economist for France and Switzerland at ING Bank.

The SNB will therefore likely cap any CHF weakness going forward as it continues its fight against inflation.

ING's Turner says the SNB has been effective in keeping the real exchange rate stable. To deliver real exchange rate stability it has allowed/engineered a 2% nominal appreciation of the trade-weighted Swiss franc over the last quarter.

"This means that EUR/CHF will probably continue to trade in a 0.97-0.99 range for most of this year and will only be allowed by the SNB to trade substantially higher if USD/CHF falls even harder," he adds.