Switzerland: SNB leaves ultra-loose monetary policy in place in June
June 18, 2020
At its meeting on 18 June, the Swiss National Bank (SNB) left its policy rate and the interest rate on sight deposits at minus 0.75%, as widely expected by market analysts. Moreover, the Bank highlighted its continued willingness to intervene strongly in foreign exchange markets as the Swiss franc has become even more highly valued in the wake of the coronavirus pandemic.
The hold came amid a highly uncertain outlook, with the current deflationary environment and anemic economic activity driving the SNB’s decision. With consumer prices falling for the fourth consecutive month to May amid low oil prices and a downturn in economic activity, the Bank reaffirmed its ultra-accommodative policy stance. Furthermore, the accommodative monetary policies enacted by other major central banks—namely the ECB and Federal Reserve—forced the SNB to keep its own rates low in order to avoid unwanted currency appreciation. To offset the associated pressures of low interest rates on banks’ profitability, the SNB has provided some CHF 10 billion in liquidity through refinancing facilities, allowing banks to receive guaranteed loans at the same rate at the SNB policy rate.
Against this backdrop, the Bank estimated a fall of around 6.0% in GDP this year, although economic activity is expected to rebound in the second half of the year after seemingly bottoming out in May. The SNB also further downgraded its inflation forecasts this month, projecting deflation for this year and next (2020: -0.7%; 2021: -0.2%) before mild inflation returns in 2022 (0.2%). As such, the Bank retained its dovish tone, stressing that “expansionary monetary policy remains necessary to ensure appropriate monetary conditions”. The majority of our panelists see the Bank holding fire this year and next, and currently see negative rates through the forecast horizon which ends in 2024.
Commenting on the monetary policy outlook, Charlotte de Montpellier, an economist at ING, noted:
“Of course, it is possible that the SNB may decide to lower rates even further if the situation were to deteriorate sharply. In fact, the SNB governor has already said several times that rates could be lowered even further. But that's not our base case. We believe that it will try to wait until the crisis passes and the uncertainty dissipates with a broadly unchanged monetary policy. This is not without challenge of course. Firstly, Switzerland is still on the watchlist of the US authorities for currency manipulation, which could limit the SNB's ability to intervene as much on the foreign exchange markets as it wishes. In addition, there is always the question of the credibility of its action, as it clearly does not allow inflation forecasts to be kept above 0%. For the time being, however, the SNB believes that the current situation is manageable and will therefore continue to rely on its usual instruments.”
The next monetary policy meeting is scheduled for 24 September.
Author: Stephen Vogado, Economist