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Switzerland Monetary Policy March 2020

Switzerland: SNB leaves ultra-loose monetary policy in place in March

At its meeting on 19 March, the Swiss National Bank (SNB) left the SNB policy rate and the interest rate on sight deposits at minus 0.75%. Moreover, the Bank noted it has stepped up its interventions in the foreign exchange market as the Swiss franc has become even more attractive in the wake of the coronavirus pandemic.

The SNB had but little choice but to maintain its expansive stance in March. Primarily, increasing safe-haven demand has caused the franc to appreciate. In addition, the monetary stances of other major central banks, mainly the ECB and Federal Reserve, have become more accommodative in recent months, forcing the SNB to keep its own rates low in order to avoid further currency appreciation. Moreover, price pressures in Switzerland have been anemic and the Bank now expects deflation this year, with consumer prices projected to fall 0.3% year-on-year due to weak global growth, low oil prices, and the stronger franc. The Bank foresees inflation of just 0.3% in 2021.

The risks to both the domestic and global economy have intensified markedly since its last meeting in December due to the Covid-19 pandemic. Containment measures in Switzerland and its European counterparts are likely to leave a heavy mark on the economy. The SNB now excepts the economy to contract this year as a whole, but did not provide GDP projections given the extremely uncertain economic outlook.

The SNB is also taking additional measures to buffer liquidity levels. The SNB has a dollar swap arrangement with the U.S. Federal Reserve and swaps with other central banks. Moreover, the Bank decided to raise the exemption threshold before negative rates apply from 25 to 30 in order to reduce the negative interest burden on the banking system. Since the 19 March monetary policy meeting, the Bank has announced additional measures. On 25 March, the Bank announced a new Covid-19 refinancing facility which will allow banks to tap into credit from the SNB at the same rate as the SNB policy rate. Moreover, the Bank urged the Federal Council to deactivate the countercyclical capital buffer, which would allow banks more maneuver to lend.

The Bank retained a dovish outlook in its communiqué, stating that “in these exceptional circumstances, the SNB’s expansionary monetary policy is more necessary than ever.” The majority of our panelists see the Bank holding fire this year and next and now see negative rates through the forecast horizon which ends in 2024.

Commenting on the monetary policy outlook, Maxime Botteron, an economist at Credit Suisse, noted:

“At this stage, central bankers seem cautious not to raise the burden on banks through deeper negative rates in a situation where credit defaults may rise quickly. In that context, we change our view on the policy rate, and now expect the SNB to keep its policy rate unchanged at -0.75% over our forecast horizon (we had expected a rate cut to -1.00% in Q2 2020). However, if the ECB were to lower its deposit rate (currently at -0.5%), the SNB would most likely need to follow suit.”

The next monetary policy meeting is scheduled for 18 June.

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