Overview#

The Swiss National Bank (SNB) is anticipated to keep its policy interest rate at 0% during its upcoming monetary policy assessment, according to UBS economists Maxime Botteron and Alessandro Bee. This decision comes despite pressures from rising energy prices and a strengthening Swiss franc due to ongoing conflicts in the Middle East.

Impact of Middle East Conflict#

The conflict has led to a surge in energy prices, with Brent oil exceeding $100 per barrel, marking an increase of over 50% when measured in Swiss francs. UBS estimates that this rise in oil prices could contribute only about 0.3 percentage points to inflation, even as it remains elevated year-on-year.

Currency Dynamics#

The Swiss franc has appreciated against the euro, driven by its status as a safe-haven currency during times of uncertainty. The EUR/CHF exchange rate fell below 0.90, indicating a more than 3.5% increase in the value of the franc since the SNB's last rate decision in December. This appreciation is estimated to reduce headline inflation by approximately 0.35 percentage points if the exchange rate remains stable.

Economic Outlook#

While the direct effects of rising energy prices and a stronger franc appear to balance each other out, risks to economic growth have increased. Higher energy costs could dampen growth and raise the risk of deflation, which is a situation where prices fall instead of rise. The SNB has expressed a willingness to intervene in the foreign exchange market to manage the rapid appreciation of the franc, rather than lowering interest rates.

Future Expectations#

UBS economists predict that the SNB will maintain its 0% policy rate in the coming months. They believe that any geopolitical tensions affecting energy prices are likely to have a short-term impact. If the global economic outlook worsens, particularly due to sustained high energy prices, a reduction in rates into negative territory could become a possibility. Their main scenario suggests that increased government spending in Germany may bolster Eurozone growth, potentially leading to a rise in the EUR/CHF exchange rate to 0.93, assuming oil prices stabilize around $70 per barrel.