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Switzerland Could Surprise with Interest Rate Hike

In: Finance, Forex

Policy makers in Switzerland are poised to join global peers in signaling concern on inflation, generating the rare spectacle of a Swiss interest-rate decision that has financial markets on edge.

Investors are wondering how long central bank President Thomas Jordan and his colleagues can resist joining the bandwagon of monetary tightening are close to pricing in a quarter-point increase, in what would be the first upward move since 2007. The rate is currently the world’s lowest.

The SNB rate has been at -0.75% for more than seven years as policy makers worked against a haven currency that they’ve long called “highly valued” or, at times, “overvalued.”

The question is how far officials, while keeping a close eye on the level of the franc, want to reposition their policy bias to reflect the dangers of inflation just as the neighboring euro area plans increases in borrowing costs too.

Excitement surrounding monetary policy increased even further on Wednesday with an emergency meeting of the European Central Bank, where officials pledged to speed up the creation of a new tool to fight market stress after a selloff that hit Italian bonds.

Despite the shadow cast by the Fed decision, strategists at Saxo Bank wrote Monday that the SNB, usually a non-event, “might be the most interesting central bank meeting of the week, for once.”

What would be surprising is if the SNB really did change rates at a scheduled decision when it has often acted unexpectedly. Policy moves in 2011, 2014, and 2015 were all sprung on financial markets out of the blue, the last one coinciding with the central bank’s shock decision to scrap its currency cap.

For Nadia Gharbi at Banque Pictet & Cie SA, this week’s decision is a “close call,” especially after the ECB committed to a rate increase in July.

Adding to the tension, Jordan’s former academic supervisor publicly said on Wednesday that it’s time to start raising.

Inflation in Switzerland was 2.9% in May, above the SNB’s goal, though not excessively so. Based on the European Union-harmonized measure, it was 2.7%, compared with more than 8% in the euro area.

It’s the outlook that will matter for Jordan and his colleagues. While they predicted in March that inflation would be 0.9% next year and in 2024, the president sounded the alarm last month, declaring that the SNB sees the risk of “second-round effects.”

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