Switzerland Update

At its latest meeting in June, the Swiss National Bank (SNB) decided to cut its policy rate for the second time this year, bringing it down to 1.25%. We expect one final rate cut in September, although it could come later.We continue to believe that the SNB will be reluctant to cut rates way below its estimate of the neutral rate, which is likely to be around 1%. For the SNB to cut rates below 1%, the bank would need to see the balance of risks to growth and inflation shifting to the downside.

Swiss bond yields fell in the wake of the French election announcement and SNB meeting in June. But after reaching a low of 0.54% at the end of June, the 10-year Swiss government bond yield had rebounded to 0.65% by 8 July, after the French election.

Taking into account the additional SNB rate cut that we now expect, we are lowering our year-end forecast for the 10-year Swiss sovereign bond yield from 0.9% to 0.7%. We therefore remain underweight Swiss bond duration because of the low yields on offer and because the inverted yield curve makes short-dated Swiss bonds more attractive.

Investors’ concerns over fiscal discipline in major economies are seen as supporting the safe-haven Swiss franc. In particular, continued political concerns in the euro area and the upcoming US presidential elections could give the currency a boost. The Swiss franc could hover between CHF0.94 and CHF0.98 relative to the euro in the next months.