The SNB surprised financial markets by opting to leave its policy rate unchanged at 1.75 percent at today's Monetary Policy Assessment (MPA). Although lacking the conviction seen ahead of the June MPA when rates were lifted by 25 basis points, the majority call was another 25 basis point hike. As it is, it seems that the recent run of sub-2 percent headline and core inflation rates was enough to convince the central bank that cumulative tightening of 225 basis points since June 2022 had left policy restrictive enough. However, the SNB warned that further rate hikes could not be ruled out while also reaffirming its willingness to intervene in the FX markets as and when deemed necessary.

The updated economic forecasts show why interest rates were left rates on hold. Conditional on a policy rate of 1.75 percent throughout, CPI inflation is still seen at 2.2 percent in 2023 and 2024. More significantly though, the 2025 projection has been trimmed from June's 2.1 percent to 1.9 percent, within the SNB's definition of price stability and so implying that the current stance is working.

Having stagnated last quarter, the Swiss real economy is expected to remain soft through the end of 2023. The full year growth forecast is unrevised at just 1.0 percent, leading to additional rises in unemployment and a probable fall in capacity utilisation. Both factors should help to keep inflation under control. However, once again the bank emphasised high levels of uncertainty regarding the outlook for both the domestic and overseas economies.

While not the market consensus, today's decision should not come as a major surprise. The Swiss RPI has been consistently negative since last March, implying a protracted run of negative surprises in the data that, of itself, will have added to downside pressure on local prices. Still, the SNB clearly indicated that a pause in tightening should not necessarily be viewed as the end of the cycle. With its staunch anti-inflation credibility already well-proven, any return to above 2 percent inflation could easily trigger a fresh hike in the policy rate in December.

After easing the pace of tightening to 25 basis points in June, the SNB is expected to make a second straight 25 point hike at September's meeting.

The Swiss National Bank (SNB) usually announces any changes to its monetary stance at its quarterly Monetary Policy Assessment. However, adjustments can be made at any time. Since 2000 monetary policy has consisted of the following three elements: a definition of price stability, a medium-term inflation forecast and a target range for a reference interest rate, the three-month Swiss franc Libor (London Interbank Offered Rate). The SNB attempts to secure an annual inflation rate as specified by the consumer price index (CPI) of less than 2 percent. In recent times this has involved sizeable intervention in the foreign exchange market to prevent appreciation of the Swiss franc although since January 2015 there has been no explicit exchange rate target.

The aim of the SNB's monetary policy is to ensure price stability in the medium and long term. By keeping prices stable (2 percent annual inflation rate), the SNB seeks to create an environment in which the economy can fully exploit its production potential. The Bank is required to set its policy to meet the needs of the Swiss economy as a whole rather than the interests of individual regions or industries.

The SNB has traditionally implemented its monetary policy by fixing a target range of 1.0 percentage points at the level deemed appropriate for the three-month Swiss franc Libor. The Bank has then normally sought to hold the rate around the middle of that corridor. However, as a result of strong capital inflows into the local currency prompted by the 2008/09 global downturn, this objective range has been both narrowed and reduced to just 0.0 - 0.25 percent, with a point target of 0.0 percent. In fact, since September 2011 the thrust of policy has been determined largely by the SNB's expressed aim of preventing the CHF strengthening beneath a CHF1.20 floor versus the euro.

The Swiss National Bank publishes its monetary policy assessments on a quarterly basis in March, June, September and December. In these reports it describes the current monetary environment and formulates its monetary policy intentions for the following quarter. It also provides inflation forecasts which help financial markets to formulate of where monetary policy might be headed. Twice a year -- in June and in December -- the Bank holds a media conference. At that time, the Governing Board provides information about the economic situation and comments on its monetary policy.