SNB policy action today: fireworks unlikely

Swiss National Bank will announce its monetary policy decisions at 8:30 GMT today.

Economic conditions

• Switzerland GDP is around $ 701 billion however growth rate has sharply slowed down. As of latest quarterly GDP grew by only 0.4%.
• During 2011 European debt crisis inflation fell to -1%, 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. As of latest economy is in deflation of -0.4%.
• Swiss yield curve is negative up to 10 years, and Switzerland now has lowest yield on record. 10 year bond yield is hovering around -0.28%.
• Switzerland, despite its currency growing strong, enjoys high current account balance, 7% of GDP.
• Unemployment rate has ticked up recently but still low around 3.7%. Overall debt burden is low.
• Swiss companies are facing considerable headwinds from slowdown in China, emerging markets, Euro zone 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.

Challenges –

• Swiss franc remained very high priced and even higher.
• Increasing FX reserve every month suggests, considerable SNB intervention to prevent Franc’s appreciation is not working its magic much.
• Inflation as measured by CPI remains at worst level since 2009 crisis, while PPI at record low.
• Stronger Franc remain headache for Swiss companies.
• Slowdown in China is hurting Swiss luxury exports.

Expectation today

Expectation is that Swiss bank will hold monetary policy steady.                                                           

• Swiss bank’s credibility is at risk, as SNB fails to take action to curb the deflationary environment.

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

After seeing Yen and Euro strengthen even after policy easing SNB is most likely to take conservative approach in today’s meeting.

Franc is currently trading at 0.977 against Dollar.