Pressure on Swiss central bank

We continue to expect economic activity in Switzerland to remain sluggish in early 2024 amid euro area weakness, with a gradual recovery from Q2 onwards. Stripping out the impact of major sporting events, we project annual GDP growth of 0.9% in 2024, down from an estimated 1.2% in 2023. Meanwhile, although increases in electricity prices, VAT and rents) will fuel inflation in Q1, we expect it to average 1.7% in 2024, down from 2.1% in 2023.

While we have not modified our forecast for Swiss growth and inflation in recent months, the sharp appreciation of the Swiss currency since mid-December leads us to change our call on monetary policy.

We previously expected the Swiss National Bank (SNB) to stay on hold in 2024, with risks tilted to some easing in H2 2024, and to reduce or even stop its interventions to strengthen the Swiss franc given that inflation was expected to be domestically driven.

For two reasons, we now expect the SNB to loosen rates by 25 bps twice this year (in June and again in September) to bring its main policy rate down to 1.25%. First, the appreciation of the Swiss franc in real terms is altering the growth and inflation outlook. Second, the SNB’s recent change of tone indicates it may be worried by the recent renewed strengthening of the Swiss currency.

We believe the next SNB meeting on 21 March will be too early for it to start cutting rates as our view is that the SNB will want to monitor potential second-round effects increases from the increases in electricity and rental prices as well as VAT. Thus, a June rate cut seems more likely in our view. Our base case that other central banks such as the US Federal Reserve and the European Central Bank will also start easing their monetary policies in June should enable the SNB to do likewise.