At the end of September, the publishers Verlag Scheidegger & Spiess brought out a book on the history of the Swiss National Bank in Zurich. Entitled “Die Schweizerische Nationalbank in Zürich, das Gebäude der Gebrüder Pfister 1922-2022”, a read of this publication could be rewarding for fans of history and architecture especially. One hundred years after its headquarters was opened in the city on the banks of the Limmat, the SNB is again confronted with a major construction project, symbolically speaking. The governing board is finding it tougher than for a long time to achieve the primary goal of the SNB: under its statutes, it must ensure price stability while not losing sight of the economy. Although the sharp rise in the cost of energy and raw materials is driving inflation in Switzerland to a lesser extent than in other regions and countries, in September the national consumer price index exceeded the figure for the same month last year by 3.3%. That means inflation is moving well above the SNB’s target level of less than 2%. According to the latest forecast, this will remain the case for the time being (see graph).
The national bank is battling this trend with the corresponding vigour. In September the governing board brought the more than seven year phase of negative interest rates to an end. “We have decided to tighten our monetary policy further and to raise the SNB policy rate by 0.75 percentage points to 0.5%.” said SNB president Thomas Jordan, summarising the latest decision. In tightening monetary policy, he wanted to counter the spread of inflation to goods and services, which have so far been less affected “It cannot be ruled out that further increases in the SNB policy rate will be necessary to ensure price stability over the medium term,” Jordan emphasised. A day before the SNB’s latest monetary policy assessment, the US central bank had given the interest rate screw another turn, when its Open Market Committee increased the Federal Funds Target Rate by 75 basis points for the third time in a row, taking it to a new range of 3.00% to 3.25%.
Although the US base rate is now at its highest level since the start of 2008, the tightening cycle will likely continue. “My colleagues and I are strongly committed to bringing inflation back down to our 2% goal,” Fed president Jerome Powell stated. The markets are taking this announcement seriously: the CME Fed Watch Tool shows a probability of more than 50% that the US central bank will add another 75 basis points to the target rate at its meeting in early November. Jerome Powell is sticking with this rigorous course, even though the world’s biggest economy is losing momentum. In its latest projections, the Fed now anticipates a growth rate of just 0.2% for 2022. Before the summer break, the central bank had pencilled in a 1.7% increase in gross domestic product (GDP).
The SNB was also forced to take a red pen to its forecasts. “For this year, we anticipate GDP growth of around 2%. This is roughly half a percentage point lower than at the last monetary policy assessment,” said Thomas Jordan. At the same time, he referred to the high level of uncertainty associated with the forecast. “The biggest risks are a global economic downturn, a worsening of the gas shortage in Europe and a power shortage in Switzerland,” the SNB president explained. The government's expert group had given a similar appraisal shortly before, likewise reducing its economic forecast for 2022 to 2%. The economists now anticipate growth of just 1.1% for the year ahead (see graph), compared with the 1.9% increase in economic output they had reckoned on only in June. The equity markets are reacting strongly to the combination of declining economic strength and rising interest rates. The SMI, for example, had lost a good fifth of its value by the end of the first three quarters of 2022. If there is a positive implication for investment from the year to date, it is the comeback of interest rates. With nothing much having been on offer for a long time, now opportunities are opening up again – and that is also and especially true in the structured product sector.
Source: SNB; as at: 22.09.2022
e=expected (expert group forecast); source: Federal Office for Statistics, State Secretariat for Economic Affairs; as at: 20.09.2022 Past performance is not a reliable indicator of future performance.
