This August 1st was a particularly stormy day for Switzerland and the SNB. Following significant financial losses in the second quarter, the return to the US list of currency manipulators, the return to a zero interest rate policy and the prospect of negative interest rates were already complicating the situation. Added to this is now the US threat to impose 39% tariffs on Swiss products.
In early June, the US put Switzerland back on its list of trading partners that might be manipulating their currency. This is an unfounded accusation, according to the SNB, which does intervene, but only to fulfil its mandate of price stability. The sharp appreciation of the franc has caused inflation to melt away, raising new fears of disinflation. These interventions have inflated the SNB's balance sheet through colossal currency positions, the very same currencies that caused the SNB's loss in the second quarter. After a gain of CHF 6.7 billion in the first quarter, losses on foreign currencies weighed on its results by CHF 22.7 billion in the second quarter, leading it to close the half-year with a total loss of CHF 15.3 billion.
Dealing with the US decision in this already difficult context is tricky. According to Bloomberg, 39% tariffs could cost Switzerland 1% of growth in the medium term, which is the expected growth rate for Switzerland in 2025. And that's without taking into account the impact of customs duties on pharmaceutical companies, which could reach 250% according to Mr Trump.
The impact on the Swiss economy will be even more disastrous and puts the SNB in an unenviable position. While some are celebrating the rise in inflation in July, caution is advised. At +0.2% for the consumer price index, compared with +0.1% expected (and +0.8% for core inflation), levels are anaemic. Inflation therefore remains close to 0%, disinflationary pressures persist and the strength of the Swiss franc is a major factor. Through the price of imported goods, its impact was -1.4% in July (compared with -1.9% in June).
What can we expect from the SNB in these circumstances? According to the bond market, the probability of a rate cut, and therefore a return to negative territory, rose from 33% to 45% in the space of a few days. The bond curve has shifted downwards and maturities up to 5 years are already in negative territory. The Swiss 2-year yield has fallen into the red at -0.18%, another way of reading market expectations in terms of rate cuts. The 10-year yield, a barometer of inflation and future growth, fell by 6 basis points to 0.28%, having been close to 0.50% in mid-July. The franc has lost some ground against the euro but remains strong against the dollar, which, combined with expectations of an economic slowdown, fuelled by the latest activity indicators, and the risk of disinflation, argues for further monetary easing. A rate cut cannot therefore be ruled out, and with Switzerland back on the list of currency manipulators, it is likely that the SNB will avoid adding fuel to the fire with the United States and take the unpopular measure of introducing negative rates. Truth to be told, the end of the summer will remain stormy for the SNB.
