Will the SNB cut policy rates back to zero?

In focus today

Central bank rate decisions are again in the spotlight with the Swiss National Bank (SNB) this morning followed by Norges Bank (NB) and the Bank of England (BoE).

We expect the SNB to deliver a final cut, cutting the policy rate by 25bp to 0%. Markets are pricing 30bp for the meeting. Inflation continues to undershoot the SNB's forecast and while a 50bp cut is possible, we think the SNB will stick with a smaller 25bp cut and if necessary, commence FX intervention to weaken the Swiss Franc before lowering into negative territory.

The BoE is expected to keep the Bank rate unchanged at 4.25 in line with market and consensus pricing. Recent data has surprised to the downside and in our opinion, this supports the notion of further quarterly cuts ahead. For more on our take see Bank of England Preview, 13 June.

On a similar note, we anticipate that Norges Bank will likely leave rates unchanged and marginally lower the rate path. Most importantly, we think that Norges Bank will stick to its message of two cuts this year, with the first one in September.

Markets are closely eyeing the possible involvement of the US in the Israel-Iran conflict. According to sources familiar with the matter, senior US officials are preparing for the possibility of a strike on Iran in the days ahead. The uncertainty was not alleviated by US President Trump speaking at the White House said "I may do it. I may not do it. I mean, nobody knows what I'm going to do,".

In Sweden at 8:00 CET, both monthly and quarterly inflation expectations from Origo are released. The quarterly figures will be particularly interesting, as the previous data remained elevated, and we anticipate a slight decrease.

Overnight, Chinese loan prime rates will be set but are expected to stay unchanged as they were lowered last month with 1Y at 3.00% and 5Y at 3.50%. Additionally, we get May inflation data from Japan. It will be interesting to see if Japan continues to have the 'wrong' kind of inflation, namely inflation not driven by spending growth.

Economic and market news

What happened yesterday

In the US, the Fed kept monetary policy unchanged at 4.25-4.5% as widely expected. The 'dots' still signal two 25bp cuts in 2025 and the GDP forecast was revised down. The policy statement was left almost untouched, apart from omitting: "[committee] judges that the risks of higher unemployment and higher inflation have risen", referring to peak trade war uncertainty easing. Fed Chair Powell provided no clear signals for the market, repeating that "policy is in a good place". We continue to expect the Fed will resume rate cuts from September and cut twice in 2025 followed by three more cuts in 2026. Read more in our Fed review: Waiting for clarity, 18 June. 

In Sweden, the Riksbank cut the policy rate by 25bp to 2.00% in line with consensus expectations, but against our call for it to remain unchanged. Additionally, the central bank opened the door for another cut later this year, although global uncertainty and unrest continue to weigh on the outlook. Following the announcement, there was a relatively muted reaction in the SEK, but we would not be too surprised to see EUR/SEK edge slightly higher over the coming weeks as the (albeit small) risk of a 'hawkish' surprise at today's meeting did not materialise.

In the euro area, the final inflation report confirmed the flash release, showing inflation at 1.9% y/y and core at 2.3% y/y. Details show that the larger than expected increase in euro area HICP inflation back in April was due to mainly seasonal effects from the timing of Easter. This is visible in the details for May where "transport services" fell back to 1.9% y/y after rising 7.8% y/y in April. Package holidays also declined to 0.9% y/y in May following an increase of 8.6% y/y in April.

The final data allows a calculation of the 'LIMI' indicator of domestic inflation. The indicator declined from 3.9% y/y to 3.8% y/y while momentum increased slightly. This shows that there is still an elevated inflation pressure in domestic inflation, which is a hawkish argument, amid headline inflation dipping below target. Yet, wage growth is the main driver of domestic inflation, and the elevated pressure reflects previous wage increases, so we do expect domestic inflation to fall in the second half of the year as wage growth is coming down. 

In the UK, CPI for May was a bit of a mixed bag with stronger headline and weaker services than expected. Headline at 3.4% y/y (cons: 3.3%, prior: 3.5%), core at 3.5% (cons: 3.5%, prior: 3.8%) and importantly, services dropped to 4.7% y/y (cons: 4.8%, prior: 5.4%). The large drop in services is due to the timing of Easter, which pushed last month's print higher and a wrongful overestimation by the ONS of the increase in road tax in April. This should not be a game changer for the BoE decision released today.

Equities: Despite a heavy flow of geopolitical headlines, a rich macro calendar, and significant central bank meetings on both sides of the Atlantic, financial markets barely moved yesterday. Equities were broadly unchanged, and the same was true across fixed income and most alternative asset classes. Sector performance in equities was muted as well, though tech managed a mild outperformance - largely on the back of idiosyncratic news flow rather than macro or policy shifts. In the US yesterday, Dow -0.1%, S&P 500 -0.03%, Nasdaq +0.1% and Russell 2000 +0.5%. This morning, sentiment has turned more negative: equity markets across Asia are in the red, led by Hong Kong where Chinese stocks are down just over 2%.  Futures in both Europe and the US point lower as we head into the session.

FI and FX: Risk sentiment was neutral through yesterday's session with global equities closing roughly unchanged. Last night's FOMC meeting was perceived as being roughly neutral in markets, with only a marginal impact on US Treasury yields. The Fed pricing was little changed, with 18bp still priced for September and around 48bp of easing priced for the full year. EUR/USD hovered around 1.15 throughout the session, while EUR/GBP ended the day close to unchanged as UK CPI failed to spur a big market reaction. EUR/SEK edged higher throughout the session, trading above 11 for the first time since early May, following the Riksbank's 25bp cut in the morning. The oil price (Brent) was unchanged at USD76.5.