SNB is set to announce its rate decision today, and the financial markets are rife with speculation. A significant gap has emerged between market expectations and those of economists regarding the magnitude of the rate cut. While a majority of economists are forecasting a 25 bps cut, market pricing suggests a nearly even split between the likelihood of a 25 bps cut and a more aggressive 50 bps reduction.
Several compelling arguments support the case for SNB to “front-load” its policy easing with a larger cut. First and foremost is the sharp decline in inflation. Last month, inflation dropped to 1.1%, well below the SNB’s estimate of 1.5% for Q3, and far below the upper limit of its 0-2% target range. The government projects inflation to drop further to just 0.7% next year, suggesting that inflationary pressures are diminishing faster than anticipated. This may compel SNB to act decisively to counter deflationary risks.
Additionally, weak economic performance in the Eurozone, compounded by the strength of the Swiss Franc, is placing considerable strain on Swiss industries. The poor performance of Eurozone purchasing managers’ indices adds weight to the argument for a 50 bps cut to support economic activity in Switzerland.
However, SNB faces constraints. With policy rate currently at 1.25%, there is limited room for rate cuts before reaching zero. Some economists argue that SNB should hold back some policy measures for future flexibility.
According to a Bloomberg survey, only one out of 32 economists expects a 50 bps cut, while two predict no change. The remaining 29 economists anticipate a 25 bps reduction to bring the rate to 1.00%. Similarly, a Reuters poll found that 30 out of 32 economists expect a 25 bps cut, with one forecasting a 50 bps reduction and another expecting rates to hold steady. Looking ahead to the end of the year, opinions are split: 16 economists believe the rate will be at 1.00%, 15 predict it will drop to 0.75%, and one expects it to remain at 1.25%.
Technically, GBP/CHF’s rally stalled after hitting 61.8% projection of 1.0741 to 1.1235 from 1.1022 at 1.1327. But further is expected as long as 1.1235 resistance turned support holds. Sustained trading above 1.1327 will pave the way to 100% projection at 1.1516 next.
