By Investing.com — UBS economists expect the Swiss National Bank (SNB) to continue its easing cycle with two anticipated rate cuts in December 2024 and March 2025.
These adjustments, expected to lower the policy rate from 1.00% to 0.50%, come in response to persistently low inflation, which has dropped below 1% and is expected to remain under this threshold into 2025.
UBS notes that keeping the policy rate at its current level would create a restrictive stance.
“In our view, such a monetary policy stance would not be warranted in an environment where inflation is expected to settle at the lower end of the target range and the economic outlook remain uncertain,” strategists led by Maxime Botteron said in a note.
The team emphasizes that “maintaining the policy rate unchanged in the current global economic environment where most central banks are lowering their policy rates could excessively raise appreciation pressures on the Swiss franc.”
This would result in tighter monetary conditions, severely reducing inflation and hindering growth.
Although foreign exchange interventions remain a potential tool for the SNB, UBS suggests that the bank may not need to rely on such actions extensively.
The bank suggests that while sporadic currency purchases could occur if the franc appreciates sharply, “persistent foreign currency purchases” are unlikely, as current rate cuts offer adequate maneuverability for the SNB.
Looking forward, UBS’s forecast hinges on balanced risks. A growth uptick, potentially spurred by China’s fiscal support, could diminish the need for a dovish stance.
Conversely, if Germany’s economic stagnation persists, UBS warns of a greater likelihood for the SNB to edge its policy rate closer to zero.
In a severe scenario involving recessionary or deflationary pressures, UBS sees potential for the SNB to adopt a negative rate and more frequent currency interventions.
On the currency front, UBS expects the Swiss franc to strengthen modestly against both the euro and the US dollar, with the latter likely to face further depreciation due to US fiscal and trade deficits.
UBS’s 12-month forecast sets USD/CHF at 0.80, citing a convergence in interest rate differentials as an additional supportive factor for the franc. Against the euro, the bank sees limited upside, maintaining its EUR/CHF outlook at 0.93 due to the franc’s existing overvaluation relative to the euro.
Meanwhile, UBS anticipates a relatively stable yield environment, particularly for the 10-year Swiss government bonds, with yields expected to hover around 0.5% over the next year.
This stability reflects market pricing of a continued SNB easing stance and international policy trends, as rate cuts from the US Federal Reserve and the European Central Bank are likely to keep long-term yields in check.