SNB Monetary Policy: Likely no action again

Swiss National Bank will announce its monetary policy decisions at 7:30 GMT today.

Economic conditions –

• Switzerland GDP is around $ 665 billion and GDP growth remains moderate. As of latest, GDP grew by 0.6 percent in the second quarter of the year, while yearly growth was 2 percent.
• During 2011 European debt crisis inflation fell to -1 percent, 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 -0.1% percent.
• Swiss yield curve is negative up to 20 years, and Switzerland now has the lowest yield on record in the worl10-yearear bond yield is hovering around -0.37 percent.
• Switzerland, despite its currency growing strong, enjoys high current account balance, 11 percent of GDP.
• Unemployment rate remains low around 3.2 percent. 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. Since then it has taken no further action.

Challenges –

• Swiss franc remained very high priced and likely to move even higher.
• Increasing FX reserve every month suggests, considerable SNB intervention to prevent Franc’s appreciation is not working its magic much. Current FX reserve stands at 665 billion in Swiss Franc.
• Inflation has recovered recently but still below the zero mark.
• Stronger Franc remains a headache for Swiss companies.
• The slowdown in China and Hong Kong has been hurting Swiss luxury exports.

Expectation today –

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

While SNB remains action less, the policymakers may find respite on the recent rise in inflation figures.  The franc is currently trading at 0.976 per dollar. We expect the franc to appreciate to 0.86 area.