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SNB cuts rates, but don’t expect the BOE to follow

Central banks are in focus this morning, especially after the surprise interest rate cut from the Swiss National Bank. A number of analysts were looking for a rate cut, although the median estimate was for no change. This is why the market has reacted to the cut. European stock index futures were given a boost and are higher across the board on Thursday, and the Swissie sold off slightly, but probably not to the extent that SNB officials were hoping.

The surprise cut to rates, the second cut since March, was justified by a fall in inflation. However, this move was designed to impact the FX market. The Swiss franc is one of the top performers in the G10 FX space in the past month and is the top performer vs. the USD in June, it has risen vs. the greenback while all other G10 currencies have declined. However, much more of an issue for the Swiss National Bank is the increase in the franc vs. the euro, its nearest and biggest trading partner. The CHF has risen some 2.3% vs. the EUR this month, after rising more than 2% in May. Although the Swissie has been weaker against the euro since the start of the year, the pace of gains in recent months is causing concern for the SNB.

SNB moves to weaken swissie

The risk is that a strong currency causes deflation and weighs on exports. Core inflation in Switzerland fell to 1.2% in May from 1.3%, which gives the SNB room to maneuver on rates. Exports also fell 3.5% last month, which is the largest decline for 9 months. The Swiss economy could also be swayed by global trends. For example, European political stress and bond market pressure, along with a slowdown in demand for luxury goods. The SNB is firm in its desire to weaken the Swissie to help deal with these challenges, and also said in its post meeting press conference on Thursday that it would intervene in the FX market if necessary. EUR/CHF has moved higher on Thursday, but we will watch this pair to see if the SNB rate cut is enough to continue to suppress swissie strength.

Norges bank pushes rate cuts into 2025

Elsewhere, the Norges bank kept rates on hold, and the Bank of England is expected to do the same at 1200 BST. The different stances between the SNB and the Norges Bank and the Bank of England is partly down to the fact that the Norges Bank and the BOE do not need to suppress their currency with rate cuts. In complete contrast to the SNB, the Norges Bank have said that they do not intend to cut rates until next year, even the BOE and the Fed have still given the markets hope that a rate cut could come later this year. The Norges Bank has taken a bold stance by suggesting that they won’t cut rates until 2025, and then only gradually. The question now is, will the Fed and BOE join them?

The NOK has risen sharply since the decision and is the strongest currency in the G10 FX space on Thursday. USD/NOK is back at its weakest level since early June. There could be a continued grind higher for the NOK if the Norges Bank looks like it will be an outlier and impose a significant delay to rate cuts.

Will the BOE rule out an August rate cut?

Wednesday’s CPI report for the UK pushed back expectations for the first rate cut from the BOE to a fine balance between September and November. The stubbornly high rate of service price inflation has eradicated the chance of a rate cut in August, according to the interest rate swaps market. In today’s statement and minutes, we will be looking for any sign that the BOE could cut rates before the end of the year, or if they are less impressed by elevated service prices and thus pull a Norges bank and hint that rates cuts are still some time away.

Either way, the market will be looking for a couple of things from today’s meeting:

1, Is the market right to price out the prospect of an August rate cut, or is a late summer cut still on the cards?

2, If they don’t cut in August, is there still a chance of two cuts this year?

The market reaction to the BOE meeting

Overall, this close to the election, we think that the BOE will keep their cards close to their chest today and they won’t commit to anything for the future. But, if they don’t change the wording of their statement too much, except acknowledging the progress made on inflation, then we could see the market rally as this could increase the chance of an August rate cut. But, if they sound concerned about service price pressures, then we expect the market to move towards pricing in a November cut.

Ahead of the BOE meeting, the FTSE 100 is higher, but is lagging the overall index. Rolls Royce is higher by more than 2% on expectations of higher defense spending in both the US and Europe. The FTSE All Share index is also rising as we head towards the BOE meeting. GBP/USD is down slightly vs. the USD, but it is at its highest level for a week vs. the euro, as the euro comes under general downward pressure on Thursday.