SNB interest rate hike. Not quite yet.

The Swiss economy is undergoing dynamic growth, as evidenced by the increase in the real GDP. The Swiss National Bank (SNB) is remaining cautious, however. When can the first interest rate hike by SNB be anticipated?

Solid growth. Real GDP is on the rise.

In the second quarter, Swiss real gross domestic product (GDP) grew by 0.7 percent compared to the previous quarter. Prior-quarter GDP was revised up from 0.6 percent to 1.0 percent. Hence, the solid growth momentum from the first quarter carried over to the second quarter. This confirms the Credit Suisse forecast of strong Swiss real GDP growth for 2018.

Credit Suisse still expects economic activity to soften through 2019. Over the summer, data has consistently indicated that strong growth should persist in the third quarter, while inflation has climbed.

Credit Suisse projects the first interest rate hike by SNB to occur in September 2019.

Maxime Botteron

Unchanged prime rate. SNB appears cautious.

Meanwhile, the euro has depreciated against the Swiss franc, at times falling below a euro-franc rate of 1.13, the lowest level since July 2017. Political risks in Italy may mount over the coming weeks as the government is due to present its budget, which may increase appreciation pressure on the Swiss franc.

Hence, the SNB will likely remain very cautious. Credit Suisse thinks its conditional inflation forecast will likely indicate an acceleration in inflation only by the second half of 2019. This suggests that the SNB intends to keep its policy rate unchanged in the first half of 2019. In this context, Credit Suisse expects only one rate increase of 0.25 percentage points in 2019, most likely in September.

Foreign exchange. Currently not appealing for SNB.

At the same time, the SNB is likely to refrain from purchasing foreign currencies at least as long as the Swiss franc does not fall precipitously below an euro-franc rate of 1.10. First, the Swiss economy is in a much stronger position than it was one or two years ago and can absorb strength in the Swiss franc. Second, most central banks are tightening their policies or have hinted at doing so.


No sign of foreign currency purchases by the SNB since July 2017

Last data point: 31/08/2018.
Source: SNB, Credit Suisse

Hence the SNB would likely not want to be the sole central bank easing its policy by purchasing foreign currencies. After all, even the recent and rapid appreciation of the Swiss franc has not led to foreign currency purchases, as indicated by stable bank sight deposits at the SNB, a good indicator of foreign currency interventions.