The Swiss National Bank (SNB) has declared an end to the local banking crisis, which involved the fall and subsequent acquisition of global investment banking giant Credit Suisse.
In a statement released following its latest monetary policy decision, SNB said its intervention alongside the Swiss Financial Market Supervisory Authority (FINMA) and the federal government has “put a halt to the crisis”.
Interventions included bolstering liquidity across the banking system by offering a Covered Loan Facility and a short-term liquidity facility.
The regulators also pre-approved global investment bank UBS’ acquisition of its embattled competitor for an estimated AU$4.8 billion.
Separately, Swiss regulators wrote-off CHF 16 billion (AU$25.6 billion) in Additional Tier 1 (AT 1) capital notes issued by Credit Suisse in a bid to ensure UBS would have enough capital to secure its AU$4.8 billion acquisition, helping to fund costs associated with the takeover.
The SNB’s declaration of an end to the banking crisis came as it lifted its policy rate by 50 bps to 1.5 per cent as part of its strategy to curb inflation.
According to Charlotte de Montpellier, senior economist at ING Economics, the SNB’s post-meeting statement suggests it believes threats to stability can be managed with “other instruments than interest rates”, including liquidity support.
“It believes that the decisions taken last weekend ‘have put a halt to the crisis’, so there is nothing to stop it from focusing on inflation again,” Montpellier wrote.
But the SNB, she added, is also attempting to restore market confidence, following the suit of the European Central Bank (ECB).
“Like the ECB, the SNB is therefore trying to convince the markets that there is no trade-off between the price stability mandate and the financial stability mandate.
“If this can be seen as a sign, the exceptional interest from the markets and the press in today’s SNB decision probably shows that not everyone is (yet) convinced.
“In our view, the two mandates can indeed be managed with different instruments, but only to a certain extent.”
Ultimately, expected credit tightening off the back of market volatility would “influence the path of interest rates”.
The SNB’s latest monetary policy decision follows 25 bps hikes from both its US and English counterparts.
The Federal Reserve lifted its funds rate by 25 bps to 4.75–5 per cent, while the Bank of England took its bank rate to 4.25 per cent.
In his post-meeting press conference, Fed chair Jerome Powell confirmed a marked shift in the central bank’s outlook following the collapse of three US banks and instability in Switzerland.
This, he conceded, could undermine the Fed’s long-term macroeconomic objectives and would hence require a moderation of the central bank’s tightening bias.
“It is too soon to determine the extent of these effects, and therefore too soon to tell how monetary policy should respond,” he said.
“As a result, we no longer state that we anticipate that ongoing rate increases will be appropriate to quell inflation.
“Instead, we anticipate that some additional policy firming may be appropriate.”
The Fed’s latest forward projections point to one additional 25 bps hike, with the median expectation among Federal Open Market Committee (FOMC) members pricing in a funds rate of 5.1 per cent by the close of 2023 and no rate cuts.
This is despite hawkish revisions to inflation expectations, with core inflation now tipped to close the year at 3.6 per cent, up from 3.5 per cent.
Continued resilience in the labour market has also been forecast, with the unemployment rate projected to hit 4.5 per cent by year’s end, down from 4.6 per cent.
GDP growth expectations, however, have been revised to the downside, with FOMC participants projecting 0.4 per cent growth in 2023, down from 0.5 per cent.
