SNB monetary policy: Assessing future bias

The Swiss National Bank (SNB) in its monetary policy meeting today decided to maintain its current expansionary monetary policy, which basically means –

• Interest on sight deposits at the SNB will remain at –0.75% and the target range for the three-month Libor will remain between –1.25% and –0.25%.
• At the same time, the SNB will remain active in the foreign exchange market.

Let’s look at the monetary policy statement for further clues and to assess the bias for future actions -

• SNB said that its policy is intended to make Swiss franc investments less attractive, thus easing pressure on the currency. The Swiss franc is still significantly overvalued.  (Dovish bias)
• The policy is also aimed at stabilizing price developments and supporting economic activity. (Neutral bias)
• The new conditional inflation forecast has been downgraded compared to June forecast. While SNB kept inflation forecast of 2016 at -0.4 percent but downgraded the forecast of 2017 to 0.2 percent from 0.3 percent and for 2018 to 0.6 percent from 0.9 percent. (Mild dovish bias)
• SNB sees strong consumer demand driving growth in the United States. While growth in the UK, Germany, and Spain remain healthy, it has stagnated in France and Italy. The Chinese economy grew robustly on the back of stimulus. Global growth has been driven by domestic demand and services while trade and manufacturing remained subdued.  (Neutral bias)
• SNB revised growth outlook in the UK and the Euro area on the back of the Brexit vote. (Mild dovish bias)
• In Switzerland, real GDP grew at an annualized pace of 2.5 percent and recovery will continue.  However, capacity utilization has remained unsatisfactory.  Recovery remained uneven sector wise and expects the growth to moderate in the second half and will be 1.5 percent for the whole year. According to the SNB’s assessment, imbalances on the mortgage and real estate markets persist. (Neutral bias)

With a lack of major dovish bias in the statement, we expect SNB to maintain current policy through 2016 and the first quarter of 2017. However, any major volatility in the market with regard to UK’s exit from the European Union may prompt the central bank to act.

Franc is currently trading at 0.975 per Dollar.