A small group of banks anticipate that Switzerland’s policymakers will defy predictions and decrease interest rates in their inaugural decision of the year, Bloomberg reported on Wednesday.
Experts at Barclays Plc, Citigroup Inc., Julius Baer & Co Ltd., and others constitute the minority forecasting that the Swiss National Bank (SNB) will implement a reduction aimed at shielding the economy from potential currency appreciation. Should this unforeseen action occur on Thursday, it would happen three months earlier than the majority anticipate.
While a reduction is perceived as a remote possibility — and would mark the first such move by a G10 central bank in this cycle — there’s a notable Swiss history of setting trends regarding interest rates. Less than two years ago, the country’s policymakers commenced raising rates ahead of the European Central Bank (ECB).
Samuel Zief, head of global FX strategy at PMorgan Private Bank, expressed his stance, stating, “If I’m going to consider going long on one currency this week, it will be the Swiss franc.” He added that the SNB “always likes to surprise,” highlighting the potential for unconventional decisions.
The rationale behind a rate cut stems from the SNB’s quarterly rate-decision schedule.
Compared to other central banks convening more frequently, the Swiss authorities might face relatively higher borrowing costs over a longer period, potentially driving the franc to appreciate.
Despite the franc’s 4 per cent decline against the euro this year, it remains 7 per cent stronger than in June 2022, just before the SNB began raising rates to shield Switzerland from imported inflation.
Maxime Botteron, an economist at UBS Group AG in Zurich, foresees the first reduction in June. However, he underscores that consumer-price growth slowed to 1.2 per cent in February, below the central bank’s projection of 1.8 per cent for the first quarter.
Botteron remarked, “The likelihood of a rate cut this week isn’t negligible. Price pressures have significantly eased.”
Swaps markets indicate a 37 per cent probability of a rate cut on Thursday, slightly higher than earlier in the week. Zief suggests that a rate adjustment would drive the franc around 1 per cent lower against the dollar and euro, nearing levels last seen in November.
Several market indicators suggest mounting pressure on the currency.
Recent CFTC positioning data reveal that leveraged funds, including hedge funds, have increased their bets for a weaker franc to their highest level in a year. One-week implied volatility in the euro-franc pair has risen to its highest point in over two months, indicating traders are hedging against potential fluctuations.
Furthermore, the franc continues to be a favored currency to sell against the yen this year, as investors anticipate higher interest rates in Japan.
However, amidst a week filled with rate decisions globally, most economists anticipate that the SNB will refrain from cutting rates.
Of the 23 economists surveyed by Bloomberg, only five anticipate a decrease. JPMorgan Private Bank and State Street suggest that the likelihood of a 25 basis-point reduction is finely balanced.
