The latest rate hike?: Why is Thomas Jordan turning the interest rate screw again on Thursday?

Jordan fears runoff effects

However, in his recent appearances and in an interview with “Sonntagszeitung”, Jordan made it clear that he still finds inflation too high and the fight against it is not over yet. Above all, the second- and third-round effects worry him. What is meant here is subsequent price and wage increases in response to rising costs.

So everything points to another rate hike this week, when the SNB set monetary policy for the summer quarter on Thursday.

The real question, therefore, is whether the SNB will rise again by 0.5 percentage points or by only 0.25 percentage points. Pricing in the interest rate derivatives markets is just one small step. However, the new base interest rate from the so-called overnight index swaps is just over 1.75 percent, at 1.83 percent, suggesting that not all market participants agree.

The fact that the SNB will not be able to make any adjustments until September 21 and that the ECB holds two more interest rate meetings by that date shows that it is a big step forward. As a result, the interest rate gap with Switzerland could reopen. This could unnecessarily depress the franc and fuel import inflation. The SNB no longer sees the franc as overvalued or refrains from commenting on the franc’s value.

A 50-step move would also be a continuation of previous policies and would match Jordan’s expressed concerns about second- and third-round effects. It should also be taken into account that the SNB does not have an inflation target of 2 percent to ensure price stability, like the US Federal Reserve, but is in the range of 0-2 percent.

Alleviating inflationary pressure argues for a small rate hike

On the other hand, the latest inflation data and indicators pointing to a loosening speaks for a smaller step. Core inflation, excluding energy and fresh and seasonal products, dropped to 1.9 percent in May. The definition of core inflation, which is widely used abroad, is even below 1.5 percent. This is unique in an international comparison, as core inflation is higher than normal almost everywhere, not including energy prices, which have fallen sharply recently.

In addition, purchasing manager surveys (PMI) show that pre-stage prices are falling overall and more Swiss companies are looking to lower prices.

Overall inflation fell to 2.2 percent, according to the consumer price index, already below the SNB’s year-end forecast in March. The runoff effects of Jordan are difficult to pinpoint: Some grocery and rental prices increased in real terms in May.

However, the increase in olive oil, fruit and vegetable prices is likely to be temporary. As for rents, it is already known that they will rise in the coming months due to the rising benchmark interest rate. However, this component of inflation cannot be slowed down by higher interest rates as it is positively correlated with the key interest rate through the reference rate.

Whatever the SNB decides on Thursday, this could be one of the last hikes in the cycle. This view has long been entrenched in the bond markets: since the start of the year, yields on Swiss ten-year bonds have dropped from 1.5 percent to just over 1 percent. Those who borrow money on the Frankish market – these are mostly property owners – can breathe a sigh of relief.