Swiss National Bank likely to keep policy on hold on Thursday

The Swiss National Bank is expected to keep its monetary policy on hold tomorrow, said Societe Generale in a research note. The U.K. Brexit referendum and recent ECB action has not led to considerable pressure on the Swiss franc even if the foreign exchange interventions have continued with reserves increasing in August to CHF 626.6 billion.

On the optimistic side, the second quarter economic growth expanded by a stronger than projected 0.6 percent quarter-on-quarter. Meanwhile, the first quarter was upwardly revised to 0.35 percent in sequential terms. It is still tough to detect the influence of net exports on Swiss economic activity. The assumption is that the solid exchange rate is having a huge dampening effect on the contribution from next exports, noted Societe Generale.

Swiss headline inflation has continued to accelerate, widely consistent with the Swiss National Bank’s June projections, mostly due to energy prices. Inflation is likely to turn positive again by the end of 2016. While the Swiss central bank’s inflation projection might remain widely unchanged this week, there is still possibility of a slightly higher inflation in 2017.

With regards to Switzerland’s GDP growth, the central bank is expected to upwardly revise its projection to about 1.5 percent or more, from between 1 percent and 1.5 percent in June. The SNB has undertaken a slightly more relaxed approach to low inflation than several other central banks, partially because of a more flexible inflation target. Still the central bank’s balance sheet has grown greatly whereas interest rates have been taken into negative territory.

For now, the SNB is unlikely to take any measure and is expected to take comfort from the fact that the Brexit has not led to further safe-haven capital flows, according to Societe Generale. The SNB is expected to consider its exit strategies in 2017, with a focus on reversing negative policy rates.

Swiss housing market continues to be a cause of concern, even if certain stabilization might be underway. If additional serious threats to the inflation and growth outlook come up, the Swiss National Bank might consider cutting policy rates further. However, with concerns regarding the impact on banks, any of such moves might require additional measures to protect banks, added Societe Generale.