Swiss central bank chief flags inflation surprise as December rate-hike bets firm

Those remarks are expected to strengthen market pricing for a rate increase in December, a step that would take the SNB away from the lowest policy rate among major central banks and could give the Swiss franc a boost. Because fuel and heating expenses drove the inflation spike, oil has effectively become a direct factor in Swiss rate expectations, linking the central bank's policy path more tightly to Middle East events. A move supportive of the franc would also narrow one of the avenues the SNB has long used to counter imported inflation. Traders will be watching wage and rent data for the second-round effects that Schlegel pointed to as the trigger for a more forceful response.

Inflation in Switzerland remains within the SNB's target band, but the pace of the latest increase has drawn the bank's notice, and the chairman is making sure the market understands that.

Summary:

• SNB Chair Martin Schlegel said the 1.5% inflation reading for October exceeded the central bank's own forecast
• The yearly increase, the largest in nearly three years, was led by fuel and heating prices, with clothing, food and footwear also rising
• The SNB is set to monitor wages and rents for second-round effects, although none of note have emerged so far
• Schlegel said the SNB would act without hesitation if price stability came under threat
• Economists now see a greater likelihood of the SNB lifting its 0% rate at the December 10 meeting

Martin Schlegel, the Swiss National Bank's chairman, said the recent acceleration in Swiss inflation took the central bank by surprise and indicated it stood ready to alter policy if price stability were endangered, Reuters reported, citing an interview with Handelszeitung that appeared Thursday.

Government figures published Tuesday showed Swiss consumer prices rose 1.5% in October from a year earlier, the steepest annual increase in nearly three years. According to Schlegel, the figure was higher than the SNB's own projection and reflected a further pickup since the last policy assessment.

Most of the rise was attributed to more expensive fuel and heating, Schlegel said, adding that clothing, food and footwear also posted price gains during the month.

The SNB's annual inflation target is 0% to 2%, and October's figure is still within that band. The worry is not the level itself but where price pressures are heading and how broadly they are spreading. Schlegel said the bank would keep a close watch, especially on any signs that the increases are reaching other areas of the economy, wages and rents among them.

To date, Schlegel said, there has been little meaningful evidence of these second-round effects, but he did not exclude the possibility later on. He went on to say the SNB would shift monetary policy without delay if price stability came under threat.

The comments matter because of the current stance of Swiss monetary policy. October's data had already prompted economists to raise the odds of a rate rise at the next meeting, while the SNB's policy rate stands at 0%, the lowest among major central banks. Schlegel did not go as far as promising a rate change, yet his admission that the inflation data took the SNB aback, together with a clear willingness to respond, is expected to reinforce those expectations. The next SNB policy announcement is scheduled for December 10.