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FxWirePro: SNB unlikely to hint policy reversal at today’s meeting

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 Federal Reserve, Bank of Canada (BoC), European Central Bank (ECB) and the Bank of England (BoE) in signaling a reversal of the loose monetary policy. And that is so because the global economy has slowed down significantly since the latter half of 2018, and the Federal Reserve just yesterday scrapped its plan to hike rates further in 2019.

However, the possibility is rising that the central bank would signal policy reversal in not too distant future, especially since SNB holds only four quarterly meetings in a year.

Given the dismal level of inflation in Switzerland (though it has been rising in recent times), 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. The recent decline in crude oil prices is likely to make the inflation target even more difficult to achieve.

Economic conditions –

  • Switzerland GDP is around $679 billion and GDP growth has picked up in recent quarters. In the Fourth quarter of 2018, growth slowed down significantly to just 1.4 percent y/y, down from 3.5 percent in the second.
  • During 2011 European debt crisis inflation fell to -1 percent, however, came to positive ground in 2014 gradually. But since mid-2014 it largely stayed in negative. The inflation returned to positive territory since 2016 but still hovering at a low compared to historical standards. Producer prices had dropped to the worst level on record in 2015. It has recovered since 2016 but still hovering well below 2 percent. Inflation is currently at 0.6 percent.
  • Switzerland enjoys one of the lowest bond yields in the world. Recently yields have risen broadly but the curve remains negative up to 15 years. The 10-year yield is currently at -0.326 percent.
  • Switzerland, despite its currency growing strong, enjoys high current account balance, 9.8 percent of GDP.
  • The unemployment rate remains low around 2.4 percent. Overall debt burden is low.
  • Swiss companies are facing considerable headwinds from the luxury market slowdown in China, emerging markets, Eurozone economies, and a 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 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 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. However, there has been a drop lately. Current FX reserve stands at 748.8 billion in Swiss Franc.
  • Inflation has recovered recently but still around 0.9 percent.
  • Stronger Franc remains a headache for Swiss companies.

Expectation today –

The expectation is that the Swiss bank will hold monetary policy steady. Franc is currently trading above parity against the dollar. (USD/CHF at 0.991)                                                                                                            No action in the face of deflation for a long time has put SNB’s credibility at risk, especially after January 2015 shock, where it shocked the market with the sudden abandoning of the EUR/CHF floor.

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