We expect the SNB to keep its key policy rates unchanged at its June monetary policy meeting this week. Notably, with the EUR/CHF hovering around the 1.05 level, there is no immediate pressure on the SNB to act now.
But with inflation expectations falling and upward pressure on yields from the European bond-market selloff, the SNB is facing possible upward pressure on real interest rates and a severe miss of the inflation target.
With rates close to the de-facto lower bound and an aversion to add to its balance sheet, the SNB may now signal more explicitly that rates will stay negative for a long time, i.e. introduce a form of forward guidance.
With markets pricing policy rates some 15bp lower within 6M, if we are right about the SNB staying put on rates, EUR/CHF should remain under pressure in the near term. We still forecast the cross at 1.10 in 12M, however, as EUR weakness is set to abate on strong medium-term fundamentals.
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