FxWirePro: SNB unlikely to make policy changes today

Swiss National Bank (SNB) will announce interest rate decision 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 and the European Central Bank (ECB) in signaling a hawkish monetary policy.

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 much lower than its target, despite the recent upticks.

Economic conditions –

• Switzerland GDP is around $660 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. In the first quarter of this year, the economy grew by 0.5 percent from a year ago. In the third quarter of this year, GDP growth has improved as the economy grew by 1.2 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. Inflation rose from 0.2 percent y/y in June to 0.8 percent y/y as of November.
• 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 -0.15 percent.
• Switzerland, despite its currency growing strong, enjoys high current account balance, 11 percent of GDP.
• The unemployment rate remains low around 3.1 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 is maintaining policy rates at -0.75% and three months target range for libor at -1.25/-0.25%.
• SNB abandoned the Euro peg at 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 thanks to a weaker dollar. 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 738.2 billion in Swiss Franc. It rose by 22 billion since SNB’s last meeting.
• Inflation has recovered recently but still below 1 percent.
• Stronger Franc remains a headache for Swiss companies.
• The slowdown in emerging economies like China and Hong Kong has been hurting Swiss luxury exports.

Expectation today –

The expectation is that Swiss bank will hold monetary policy steady. Franc is currently trading above parity against the dollar. (USD/CHF at 0.985)  

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.  In addition to that, the recent positive data from Eurozone and ongoing recovery in Europe remain beneficial for Swiss economy.