Swiss National Bank signals readiness to act on inflation, boosting December rate hike bets

What happened

Swiss National Bank (SNB) Chairman Martin Schlegel indicated that the central bank was caught off guard by the recent jump in Swiss inflation, which reached 1.5% in October, the highest level in nearly three years. Although the index remains within the SNB's target (between 0% and 2%), the speed and breadth of price increases have drawn the institution's attention. Schlegel attributed the rise mainly to higher fuel and heating costs, although prices for clothing, food, and footwear also climbed. He stated that the SNB is closely monitoring the situation, especially for the occurrence of second-round effects, such as wage and rent increases, which have not yet been observed significantly. The SNB chairman emphasized that the bank would not hesitate to adjust its monetary policy if price stability were at risk. These statements reinforce expectations that the SNB might raise its policy rate, currently at 0%, at its next monetary policy meeting on December 10.

Why it matters

Schlegel's remarks are significant because the SNB maintains the lowest policy rate among major central banks. The signal that the bank is ready to act against inflation, even if still within target, suggests a potential shift in monetary policy. A rate hike would be a notable move and could have important implications for the Swiss economy and the Swiss franc. The reliance on energy costs for the inflation increase also links SNB policy more directly to developments in global commodity markets, especially oil. Furthermore, a stronger franc would reduce one of the main channels through which the SNB has historically leaned against imported inflation.

Market impact

• Interest rates and bonds: Bets for an SNB rate hike in December are increasing. This tends to lead to an increase in short-term Swiss bond yields as investors price in tighter monetary policy. Long-term bonds may also experience some upward pressure on yields, though to a lesser extent, reflecting inflation expectations and the central bank's stance.
• Dollar and FX: The Swiss franc (CHF) tends to strengthen against other currencies, including the dollar. The expectation of a higher interest rate makes the franc more attractive to investors seeking yield, increasing demand for the currency.
• Equities: Swiss equities may face some downward pressure, especially those of companies more sensitive to higher funding costs or a stronger franc, which can hurt exporters. However, the impact might be mitigated if the SNB's action is seen as a necessary move to ensure long-term economic stability.
• Commodities: The rise in fuel and heating costs, driven by oil prices, is a direct input to Swiss inflation. If SNB policy is influenced by these costs, it could indirectly link Swiss rate expectations to oil price movements.

What to watch

Investors should closely monitor future wage and rent data in Switzerland, as Schlegel indicated these would be key indicators of second-round inflation effects. The SNB's next monetary policy decision on December 10 will be crucial to confirm or invalidate current rate hike expectations. Additionally, developments in global energy prices will continue to be an important factor.

Scenarios

Base case: The SNB raises its policy rate in December, strengthening the Swiss franc and aiming to curb inflation, with short-term Swiss bond yields rising. The central bank continues to monitor second-round effects. Risk case: The SNB opts not to raise rates in December, perhaps due to the absence of significant second-round effects or an unexpected economic slowdown, which could weaken the Swiss franc and create uncertainty about the future monetary policy path.

Original source: ForexLive (InvestingLive). For information only, not investment advice.