The ECB and the SNB strike readiness, not haste, to act amid shifting economic landscape

Highlights: In a fast-moving geopolitical landscape, the European Central Bank (ECB) and the Swiss National Bank (SNB) stroke a tone of readiness and calm while acknowledging the reality of a shifting economic backdrop. While both central banks expect higher energy prices to push near-term inflation higher and growth lower, under their base case, medium-term inflation should remain contained. We continue to see policy rates unchanged at 2.0 per cent for the ECB, and at zero for the SNB this year. We have a neutral view in most European equity markets, as our largest preference remains with the US and certain Asian markets. We favour quality IG credit and have a neutral long-term view on EUR and CHF.

• The ECB sees that the balance of risks has clearly shifted to stronger inflation and weaker growth but believes it is “well positioned” to navigate that, amid a better starting point for the economy compared to 2022. While not committing to any time frame for rate adjustments and highlighting that its focus on medium-term rather than short-term inflation moves, the ECB highlighted it closely monitors ongoing developments and stands ready to act if data suggest so
• The SNB sees higher inflation in the near-term but stabilising later and staying within the range of price stability. Policymakers believe zero rates are appropriate and stimulative for the economy but stand ready and are increasingly willing to curtail any rapid and excessive strength of the franc that could pose headwinds to growth
• European assets started the day on a weaker tone along with global financial markets amid escalating tensions in the Middle East, including strikes on key energy infrastructure. EUR found some support, and CHF softened amid contrasting rhetoric by the two central banks. Eurozone bonds were under pressure amid rising inflation concerns from higher energy prices and spillovers from the UK Gilt market, while equities extended a daily decline to near 2 per cent
• Our base line expectations remain that both the ECB and the SNB will leave rates on hold in 2026. As such, we keep a neutral long-term view on EUR and CHF, which could recover part of their recent weakness if geopolitical uncertainty unwinds. We prefer European IG credit of medium-to-long duration over high yield and sovereign debt. We take a neutral view for most Eurozone markets (ex-France) and Switzerland and focus on sectorial opportunities that are underpinned by ongoing structural themes