SNB unlikely to follow other central banks to tapering

Swiss National Bank (SNB) will announce interest rates at 8:30 GMT today and it is highly likely that the central bank would not follow its other developed market counterparts such as the Fed, the ECB or the BoJ to tapering. While the tapering from the US Federal Reserve is well under way, the European Central Bank (ECB) for the first time announced a slower pace of asset purchases earlier this month. And, the Bank of Japan (BoJ) has introduced yield curve control, which could be used as a tool for tapering in the future.

However, SNB is likely to maintain the current policy as the inflation still remains in the negative.

Economic conditions –

• Switzerland GDP is around $ 665 billion and GDP growth has slowed in recent quarters.  In the third quarter of this year, GDP growth was zero, and it is up just 1.3 percent from a year ago.
• 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 -0.3 percent.
• Switzerland enjoys the lowest bond yield in the world. Recently yields have risen broadly but the curve remains negative up to 10 years. The 10-year yield is currently at -0.07 percent.
• Switzerland, despite its currency growing strong, enjoys high current account balance, 11 percent of GDP.
• Unemployment rate remains low around 3.3 percent. Overall debt burden is low.
• Swiss companies are facing considerable headwinds from the slowdown in China, emerging markets, the Euro zone economies and a 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 642 billion in Swiss Franc.
• Inflation has recovered recently but still below the zero mark.
• Stronger Franc remains a headache for Swiss companies.
• A 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, as well as in the inflation expectations.  The franc is currently trading at 1.024 per dollar.