SNB to follow ECB and hike policy rate by 50 bps on March 23

© Reuters. FILE PHOTO: Swiss National Bank (SNB) headquarters are seen in Zurich, Switzerland March 16, 2023. REUTERS/Denis Balibouse/File Photo

By Indradip Ghosh

BENGALURU (Reuters) - The Swiss National Bank will hike its key policy rate by 50 basis points on Thursday, matching the European Central Bank's move last week, as tackling inflation trumps concerns over financial market turmoil, a Reuters poll of economists showed.

But markets are currently pricing just over a 50% chance of a smaller 25 basis point increase as a slump in bank shares, driven in part by the demise of Credit Suisse (SIX:CSGN) Group AG, sustain worries about the health of the global banking sector.

Despite Swiss rival UBS Group's emergency takeover of Credit Suisse, investors remain concerned about the losses some Credit Suisse bondholders will be forced to take.

Still, the central bank will on Thursday hike its policy rate by 50 basis points for the second consecutive time, taking it to 1.50%, said 21 of 27 economists in the March 17-20 Reuters survey, as inflation has resumed its ascent since the start of the year.

Although that would track the European Central Bank's (ECB) move last week it would be more than a 25 basis point hike expected from the U.S. Federal Reserve on Wednesday.

Only six economists expected the Swiss National Bank (SNB), which is already behind many major central banks in terms of cumulative rate hikes, to go for a 25 basis point hike.

"The SNB will face a difficult situation .... It will have to balance the need to fight inflationary pressures ... with the one to preserve the stability of its financial system and its largest banks," said Karsten Junius, chief economist at J. Safra Sarasin.

"We expect the SNB to separate these issues, which would argue for an interest rate hike and a willingness to provide additional liquidity lines if needed, similar to the approach the ECB adopted at its meeting."

Earlier this month, SNB chair Thomas Jordan said the central bank was committed to bringing inflation, currently running at 3.4%, back within its 0-2% target.

Inflation will remain above the SNB's target at least until next year, the latest poll showed, meaning more rate hikes are possible.

Although there was no consensus around the peak rate, a clear majority of economists, 13 of 21, expected one more rate hike in June of at least 25 basis points. None expected the central bank to cut interest rates this year.

Most respondents predicted the policy rate to peak at 1.50% or slightly higher, well below expectations for the Fed and ECB peak rate of 5.00-5.25% and 3.75%, respectively.

That might put further pressure on the Swiss franc. It has already lost around 2.5% against the euro since the ECB's decision last week.

Indeed, seven of 11 respondents said the bigger risk to their terminal interest rate forecasts was higher than they expected.

"Recent market concerns over banks should not impede the SNB's policy normalisation, and are expected to be tackled via targeted liquidity tools if necessary," Barclays (LON:BARC) analysts said.

"In line with the SNB's recent hawkish rhetoric towards inflation and its strong preference for CHF appreciation, we see upside risks for the policy rate path."

The central bank last year departed from a campaign it waged for years to rein in the safe-haven currency and intervened in markets to prop up the franc.

An already-weakening Swiss economy was forecast to grow just 0.6% this year and 1.4% in 2024, less than 1.1% and 1.5% predicted by the government.