| Ramzi Chamat
The month of June was marked by significant decisions made by central banks. The US Federal Reserve (Fed) and the European Central Bank (ECB) announced measures regarding interest rates. The Swiss National Bank (SNB) also made a decision by increasing the benchmark interest rate by 0.25% to reach 1.75%.
Globally, the interest rate environment presents contrasts. In the United States, despite a strong labor market, inflation is decreasing. The Consumer Price Index (CPI) in the US reached its lowest level in two years, standing at 4%. As a result, the Fed decided to maintain the target range for the benchmark interest rate at 5.00% to 5.25%, but Fed Chairman Jerome Powell mentioned the possibility of two additional rate hikes by the end of the year. Consequently, it is expected that the benchmark interest rate will reach 5.75% to 6.00% by the end of the year. The markets reacted to this announcement, considering it more restrictive than anticipated, which led to a slight appreciation of the US Dollar Index (DXY).
Despite the decrease in inflation in the Eurozone to 6.1% by the end of May, the ECB decided to increase the benchmark interest rate by 25 basis points, bringing it to 4.25%. The ECB intends to continue raising interest rates in the medium term. This decision resulted in a slight appreciation of the Euro against the US Dollar and the Swiss Franc.
Taking into account the current inflation and cumulative inflation in recent years (2020-2023) in the United States and Europe, which are significantly higher than in Switzerland, the SNB considers the Swiss Franc to be undervalued. The interest rate differential between the United States, Europe, and Switzerland now puts additional pressure on the Swiss Franc.
These decisions have put the SNB under pressure. Although inflation decreased to 2.2% in May, a devaluation of the Swiss Franc could import inflation from Anglo-Saxon and European countries. To counter this trend, a new 0.25% increase in the benchmark interest rate was announced. Increasing the benchmark interest rate and currency sales by the SNB remain the most effective means to combat inflation.
These rate hikes by the SNB have consequences for financing costs. Short-term financing costs become higher, and the yield curve is currently inverting, with medium and long-term interest rates lower than one year rates. The market anticipates that the SNB's rate hikes will have a positive medium-term effect, leading to a reduction in inflation and interest costs.
Sources: Raiffeisen Suisse, SNB.
