Swiss National Bank (SNB) will announce interest rates at 8:30 GMT today and it is highly likely that the central bank would not follow actions of its other developed market counterparts such as the Fed, the ECB or the BoJ again.

Given the dismal level of inflation in Switzerland, we expect the Swiss National Bank (SNB) to be one of the very lasts to taper monetary policy.

At today’s meeting, SNB is likely to maintain the current policy as the inflation still hovering close to zero, despite the recent upticks.

Economic conditions:

• Switzerland GDP is around $ 671 billion and GDP growth has slowed in recent quarters. In the final quarter of last year, GDP grew by just 0.1 percent on a quarterly basis and just by 0.6 percent from a year ago.
• During 2011 European debt crisis inflation fell to -1 percent, however, came to positive ground in 2014 gradually. But since mid-2014 and last year it largely stayed in negative. Producer prices have dropped to worst level on record last year. After suffering deflation throughout 2016, inflation has recently ticked up to 0.6 percent.
• Switzerland enjoys the lowest bond yield in the world. Recently yields have risen broadly but the curve remains negative up to 10 years. The 10-year yield is currently at -0.03 percent.
• Switzerland, despite its currency growing strong, enjoys high current account balance, 11 percent of GDP.
• The unemployment rate remains low around 3.3 percent. Overall debt burden is low.
• Swiss companies are facing considerable headwinds from a slowdown in China, emerging markets, Eurozone economies and stronger Franc.

Current policy –

• SNB has kept policy rates at -0.75% and three months target range for LIBOR at -1.25/-0.25%.
• SNB abandoned the Euro peg of 1.20 in January 2015, days before ECB first announced QE. Since then it has taken no further action.

Challenges –

• Swiss franc remained very high priced and likely to move even higher. According to OECD calculations, the franc remains the most overvalued currency against the dollar among OECD partners.
• Increasing FX reserves every month suggests considerable inflows of money. Current FX reserve stands at 668 billion in Swiss Franc.
• Inflation has recovered recently but still close to the zero mark.
• Stronger Franc remains a headache for Swiss companies.
• A slowdown in China and Hong Kong has been hurting Swiss luxury exports.

Expectation today –

The expectation is that Swiss National Bank will hold monetary policy steady. Franc is currently trading just above parity against the dollar. (USD/CHF at 0.999)                                                                                                       No action in the face of deflation for a long time has put SNB’s credibility at risk, especially after January 2015 shock.

However, with SNB balance sheet crossing 90% of GDP, considerable doubts remain over what the bank can do, even if it wants to, other than just cut rates further, which doesn’t seem to be working.

While SNB remains action less, the policymakers may find respite on the recent rise in inflation figures, as well as in the inflation expectations.