SNB’s final monetary policy meeting of 2023 - Will it surprise market participants

SNB’s final monetary policy meeting of the year - Will it surprise market participants again?

The Swiss National Bank is due to meet to discuss and set Monetary Policy again for the last time in 2024 this Thursday morning at 8:30 AM GMT.

Surprisingly, in its September meeting, the SNB maintained its benchmark policy rate at 1.75%, citing the substantial tightening of monetary policy in the last several quarters as a means to counteract the persistent inflationary pressures. In contrast to market expectations of a 25 basis point rise, the move signified a halt in the rate-hike campaign that began in June of last year.

Meanwhile, the SNB recently announced plans to decrease what it pays out to commercial banks after its announcement to lower the interest rates paid to lenders that deposit funds with the bank overnight.

The modification came after a significant increase in expenses resulting from the transition from negative interest rates, which were implemented to curb the appreciation of the secure Swiss franc, to positive rates as part of its efforts to combat inflation.

In the first half of 2023, the central bank distributed 3.3 billion Swiss francs as interest on sight deposits. This was a reversal from almost eight years of negative rates, during which commercial banks had to pay the central bank to hold their cash overnight. This new policy change will decrease costs, but wont impact Monetary Policy, says the bank.

As inflation has begun to reduce back to target, and GDP fell short of expectations lately, forecasts are for another hold on rates heading into the new year. We’ll take a look below at what the data suggests and the predictions from analysts, and given that currency valuation is primarily determined by fluctuations in short-term interest rates, traders will no doubt be closely monitoring this meeting.

Previous Meeting’s Outcome

The SNB maintained its policy interest rate at 1.75% in September, stating that while inflation across the country has decreased, further tightening isn’t yet out of the question.

Policymakers will carefully watch the evolution of prices in the following months, but they also emphasised that it cannot be ruled out that additional monetary policy tightening may become required to guarantee price stability over the medium term.

Meanwhile, inflation projections for 2023 and 2024 remained unchanged at 2.2%, while this year, the Swiss economy is expected to increase at a rate of around 1%, which is in line with earlier predictions.

Inflation rate now less of a concern but risks remain

In November, the annual inflation rate in Switzerland decreased to 1.4%, which was lower than both market predictions and the rate of 1.7% in October. The rate reached its lowest point since October 2021, as prices decreased for things such as leisure and culture, food and alcoholic beverages, tobacco, restaurants and hotels. Furthermore, costs for transit and healthcare continued to decrease. On the other hand, expenses increased more rapidly for housing and electricity.

The Consumer Price Index (CPI) decreased by 0.2% on a monthly basis, after seeing a 0.1% gain in the previous month. Simultaneously, the core rate, which does not take into account unstable commodities such as unprocessed food and energy, slightly decreased from 1.5% to 1.4%.

During a recent central bank conference in Zurich, Chairman Thomas Jordan indicated that due to lower inflation rates and higher interest rates compared to a year ago, it has become significantly more challenging to strike a balance between the risk of excessively tightening monetary policy and the risk of insufficiently tightening it. He also spoke of the significant ambiguity surrounding the economic forecast, and that there is currently no well-defined trajectory for monetary policy in the immediate future.

Increasing job numbers may also prove a risk to price increases. After growing by 2.2% in the prior quarter, non-farm payrolls in Switzerland climbed by 1.9% year-on-year in the third quarter of 2023, reaching a new high of 5.465 million. However, The unemployment rate also recently reached its highest level since February, with the number of unemployed individuals rising by 4,448 from the previous month to a total of 98,011.

What to expect at this week’s meeting?

Economists surveyed by Bloomberg recently expect the SNB will keep rates on hold this week, and not decrease them for the first time until September next year. Further suggesting that this would potentially be one of only two cuts anticipated.

According to the survey findings from last week, it is anticipated that the bank will keep borrowing rates steady at 1.75% until the initial adjustment in the first quarter, lowering them to 1.50%. Subsequently, two additional decreases of 25 basis points each are also expected in 2024 and 2025.

Illustrated in the chart below, the Swiss Market Index (SMI) has experienced a rise since early November, recovering from a notable decline and currently hovering around 11,106 points, equivalent to its October level. However, the primary Swiss index remains notably below its annual peak of approximately 11,600 points, with only a 1.43% increase since the start of the year.


Daily Chart of the SMI Index - Source: ActivTrades’ online platform

This performance is comparatively much lower than that of its European and American counterparts, as the DAX 40 and the CAC 40 are up more than 19% and 14% since the beginning of the year, while the S&P 500 is up more than 20 % and the Nasdaq is up more than 38 % over the same period.

The SNB meeting, along with several other central bank meetings this week—including the Fed, the ECB, and the BoE—is likely to prompt reactions from market participants (either confirming expectations of rate cuts next year or tempering optimism for a less restrictive monetary policy in the coming year).


Daily Charts of the EUR/CHF and the USD/CHF - Source: ActivTrades’ online platform