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Switzerland Monetary Policy September 2019

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

At its meeting on 19 September, the Swiss National Bank (SNB) maintained its current expansionary policy stance as widely expected by market analysts. The Bank left the SNB policy rate set at minus 0.75%, and subsequently kept the interest rate on sight deposits also unchanged at minus 0.75%.

The SNB remains between a rock and a hard place in its monetary stance. Safe-haven demand for the Swiss franc has been strong amid a very uncertain global climate and the ongoing U.S.-China trade conflict. The Bank continues to deem the franc to be highly valued and the foreign exchange market as “fragile”. Consequently, the SNB considers a continuation of the record-low interest rates and market intervention as necessary to curb the attractiveness of assets denominated in francs and to avoid a sharp appreciation of the currency. The strong Swiss franc has kept inflationary pressures relatively absent and the Bank lowered its inflation forecasts for 2019 and 2020 to 0.4% and 0.2%, respectively (June forecasts: 2019: 0.6%; 2020: 0.7%). Meanwhile, economic momentum waned notably in the first half of the year, weighed on by the adverse external environment. SNB now expects growth of between 0.5% and 1.0% for 2019 (June forecast: +1.5%).

These developments paired with the ECB’s latest monetary stimulus package leave the SNB with little room to raise rates. The majority of FocusEconomics panelists see the Bank stuck in its ultra-accommodative monetary stance this year as well as next, and also expect the Bank to ramp up currency intervention.

Despite the ECB’s recent rate cut, the majority of our panelists do not foresee the SNB diving further into negative territory in its trails, as Maxime Botteron from Credit Suisse notes:

“We consider lowering the policy rate deeper into negative territory to be a bold step for an economy that we expect to grow near its potential, where inflation has been positive for 2.5 years and the unemployment rate has fallen to 2.3%.” 

That said, some panelists noted that severe pressure on the CHF and the resulting deflationary pressures could force the Bank to consider additional easing as ING economist Charlotte de Montpellier explains: 

“Since August, there is evidence that the Swiss central bank intervenes regularly in the foreign exchange market. In fact, this is the first thing the SNB does when the CHF appreciates too much. If the franc strengthens further due to a more accommodative monetary policy by the ECB and a rise in global uncertainty, the SNB may need to implement other measures, including a rate cut.”  

Analysts at UniCredit expressed similar sentiment, stating:

“We expect the SNB to remain on hold, with the policy rate at -0.75%. […] If there is further upward pressure on the CHF, we think that the SNB is likely to intervene more strongly on FX markets. The recent announcement of open-ended asset purchases by the ECB also argues for the SNB adopting a wait-and-see strategy. Only if the CHF strengthens significantly and (core) inflation falls below zero (currently somewhat below ½% yoy), might a further rate cut be considered.”

The next monetary policy meeting is scheduled for 12 December 2019.

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