The Swiss National Bank (SNB) is due to meet this week to set monetary policy. The market consensus is for no change to policy, despite the economic indicators. Does that just set us up for another shock?
Admittedly, it would take a monumental cut to interest rates to provide a bigger shock than when the SNB depegged the franc against the euro. That was a once in a generation event which led to the franc appreciating over 40% at one stage. But the SNB could certainly take the market by surprise and provide a several hundred pip movement in the currency.
The SNB has always kept an eye on the actions of the ECB when deciding their own monetary policy. Being surrounded by Euro countries, it makes sense to pay attention. The SNB depegged the franc in anticipation of a large QE programme from the ECB. Last week the ECB disappointed the market by only cutting the deposit rate by 10 basis points and by extending QE by 7 months, not expanding it. The SNB initially implemented negative interest rates in order to maintain the traditional differential between EU and Swiss rates, so the recent ECB cut may force another Swiss cut. Interest rates are currently at -0.75% and a 25bp cut will see them hit a record low of -1.00%.
Inflation has been a major headache for the SNB and it has only gotten worse since the price floor between the euro and the franc was removed. Inflation is currently at a record low of -1.4%, something that will be very troubling for the central bank. The SVME PMI is also a headache for the bank, having slipped back into contraction at 49.7, down from 50.7 and retail sales too are an issue at -0.8% y/y. Finally, GDP disappointed last week at 0.0% q/q, short of market estimates of 0.2%.
SNB Chairman Thomas Jordan has called the Swiss franc “significantly overvalued” on several occasions, indicating the central bank would love to see it depreciate, particularly against the euro. After the ECB’s announcement, it briefly appreciated, but soon clawed back the losses potentially thanks to SNB intervention. Swiss foreign currency reserves have climbed to their highest level ever at CHF 562.7b, up from 550.9b last month.
The SNB are clear on their desire for a weaker franc, and cutting rates would certainly get there, as well as supporting the domestic economy. Keep a close eye on the meeting this Thursday as they might just have one more surprise for the markets this year.