Will the Swiss National Bank Increase Its Key Rate Despite Market Turmoil?
In its statement the bank signaled that further increases in the policy rate might be required to ensure price stability over the medium term. Since then, inflation has been continuing to rise in Switzerland, now at an annualized rate of 3.4% measured in early March.
The question is, will the central bank feel pressure during its quarterly meeting scheduled for this Thursday to pull that figure back into the target range of 0%-2% with tighter policy despite recent difficulties in the banking sector?
Emergency Measures Somewhat Helping to Calm the Waters
Two major events for international markets happened during the last weekend. Swiss authorities stated that UBS would acquire rival Credit Suisse after regulators hurriedly worked through the weekend to reach an agreement before markets opened on Monday.
The 167-year-old Swiss institution had gotten itself into strife due to a number of scandals over a period of years, a series of management changes, multi-billion dollar losses and a recent slide in its shares and bonds due to heightened concerns about a worldwide banking crisis. This forced the Swiss National Bank to send Credit Suisse a $54 billion lifeline to shore up liquidity, but it wasn’t enough to save it.
Although the new merger with UBS was good news for markets throughout the world since it helps eliminate the possibility of further panic, it came at a high price for certain types of investors and has had a negative effect on the markets.
The purchase price of CHF 0.76 per share was much lower than Credit Suisse’s Friday closing price of CHF 1.86, wiping out about CHF 16 billion in Credit Suisse’s Additional Tier 1 capital bonds, and concerns about a domino effect have already caused some investors to sell their AT1 bonds from other lenders. Hence, the market instability continues.
Having said that, the Federal Reserve and five other central banks also just announced a concerted initiative to supply more liquidity to money markets by boosting the frequency of its USD swap lines operations from weekly to daily. This seems to be merely preventative, given there was no concrete evidence of unusually high demand for dollars in the previous week. There is presently a draw of $470m via swap lines, which is up somewhat from the $390m observed a month ago but far less than the $400bn seen during the height of the pandemic.
ECB Seems Unfazed by Turmoil With Recent Policy Decision
Despite many fearing that increased borrowing costs may trigger a domino effect throughout a banking industry already suffering from the loss of faith in Switzerland’s second-biggest lender, Credit Suisse, the ECB boosted interest rates across the eurozone by 50 basis points on the 16th March.
The ECB, which is responsible for monetary policy in the 20 countries that use the euro, has suggested that high inflation is likely to persist for longer than would be acceptable, which required the central bank to carry out its already announced round of rate hikes.
The hike of 50 basis points brings the base rate to 3.5%, while the rate paid on deposits from Eurozone banks at the ECB rises to 3%.
The ECB made it plain at its previous meeting in February that it planned to raise rates this month, but the markets had been betting on a last-minute U-turn in light of the volatility of the last week.
On Thursday, the ECB suggested its governing council was watching recent market tensions carefully, and was ready to react as required to protect price stability and financial stability in the Eurozone.
What Are Markets Expecting?
A Reuters survey of economists predicted that the SNB would raise its benchmark policy rate by 50 basis points on Thursday, in line with the European Central Bank’s decision the previous week, as addressing inflation should take precedence over worries about financial market instability.
Nevertheless, the same article suggests markets are presently pricing in a little more than 50% possibility of a lower 25 basis point hike as a decline in bank shares, in part caused by the downfall of Credit Suisse Group AG, sustains fears about the health of the global banking industry.
Analysts at the Swiss private bank, Julius Baer, also predict that the Swiss franc will recover from its recent decline and that the Swiss National Bank (SNB) will raise interest rates by another 50 basis points this week.
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