Swiss National Bank likely to keep policy rate unchanged

The Swiss National Bank (SNB) is expected to keep its policy on hold tomorrow. While the latest ECB move should pressurise the SNB to take measures, there has not been major fallout on currency. Lower growth and inflation in Switzerland adds to the headwinds of accelerating inflation back into positive territory. However, the central bank has been explicit that it sees restrictions to monetary policy. Hence, the central bank is likely to be on hold and wait for further evidence of negative impacts from strong currency and low inflation.

Low inflation is not necessarily negative for the Swiss economy as it slowly undoes the effect on price competitiveness from the strong nominal exchange rate. The Swiss economy, for a few years has show major resilience against entering recession, expanding only marginally slower than potential. Switzerland’s economy in Q4 2015 had expanded above expectations by 0.4%, outperforming the euro area. For the entire 2015, the economy grew 0.9% and is likely to record similar, but higher growth in 2016.

The Swiss National Bank is also expected to revise down growth from its current estimate of 1.5%. Domestic demand continues to be the main growth driver, but net exports also contributed strongly to the economic growth. Overall, continued resilience in domestic data is expected, particularly in consumption. Meanwhile, obstacles from uncertainty and external demand might weigh on investment and trade.

“For the SNB’s new inflation forecasts, we expect a smaller downward revision for this year, to around -0.7%, while for 2017 it could remain broadly unchanged”, says Societe Generale.

Even though inflation trends might be turning now as the base effects from changes in oil prices in 2016 will begin to accelerate headline inflation, weakness in global economy is expected to keep inflation low for a longer period of time. If inflation continues to be in negative territory, it might be difficult for the central bank to remain inactive in the longer run. Cutting the interest rate further continues to be an option; however, it seems unlikely in the current context of market mistrust in this instrument.