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Since the beginning of the rate hike cycle in 2022, the Swiss National Bank (SNB) has frequently surprised the markets by setting its policy rate differently than expected by experts beforehand. Five of the last 12 interest rate decisions deviated from analysts' consensus expectations. Given ongoing geopolitical uncertainties and unpredictable US trade policies, it is becoming increasingly difficult to predict the SNB's monetary policy decisions.
To address these challenges, we have conducted a scenario analysis alongside a point forecast, based on three key variables: economic growth, inflation, and the exchange rate.
The SNB's task is to maintain price stability, aiming for a positive inflation rate of less than 2 percent. Economic growth directly influences inflation: strong growth fuels inflation, while weak growth dampens it. The exchange rate also plays a role, as it affects import prices. In addition to monitoring these data, we have developed a dynamic factor model to estimate monetary policy signals in real-time. This model helps to better understand the impact of changes in the economic environment on scenarios and forecasts.
In the base scenario, we expect a final rate cut in 2025 from 0.50 to 0.25 percent, likely at the upcoming monetary policy assessment on 20 March. In this scenario, we expect Switzerland's economic growth to slightly rise to 1.5 percent, supported by improved demand in the Eurozone. Inflation is expected to fall below 0.5 percent in the first half of the year before slightly recovering. The Swiss franc is expected to remain stable. The recent economic data largely support this scenario: inflation fell to 0.3 percent in February, and the franc has remained relatively stable.
However, stronger economic growth and continued depreciation of the franc could argue against a rate cut as early as March and prompt the SNB to postpone it to June. In addition to economic factors, political factors also influence the SNB’s decisions. The US has increased tariffs on imports from various countries, which could burden growth in the affected regions. At the same time, the EU and Germany are easing their fiscal policies, which could support European growth.
In the positive scenario, in which growth indicators remain positive and inflation does not decline further, we would expect the policy rate to remain at 0.50 percent in 2025. In the negative scenario, we would anticipate further rate cuts if inflation falls toward zero and the Swiss franc appreciates significantly. Such a negative scenario could be triggered by high US import tariffs that weaken growth in the Eurozone.
Yields on 10-year Swiss bonds have recently risen, influenced by fiscal policy announcements from the EU and Germany. However, this increase could quickly be reversed by rising risk aversion, especially if political uncertainties intensify further. If the SNB refrains from a rate cut in March, the current yields could be justified.
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