SNB to Hold Fire on Rates as ECB Stimulus Impact Falls Short

  • Central bank set to maintain rates at record low on Thursday
  • Franc weakened to 7-week low after Draghi disappointed markets

Swiss National Bank President Thomas Jordan can afford to bide his time.

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As he and fellow policy makers gather for their quarterly meeting, they can take comfort after the European Central Bank’s latest stimulus failed to live up to expectations. That’s in contrast to a year ago, when the cost of defending its currency cap in the face of euro-area easing forced the SNB to cut interest rates and, ultimately, scrap the once-cornerstone policy.

Economists forecast the SNB will keep the deposit rate at a record-low minus 0.75 percent on Thursday. Maintaining a steady policy for now will give Jordan time to assess the longer-term impact of the new ECB action -- as well as a possible Federal Reserve rate hike next week. And while the franc has stopped strengthening against the euro, it’s still up 11 percent this year, which is pushing down inflation and weighing on economic growth.

“Since the cut in the deposit rate by the ECB was only modest, we don’t expect the SNB to follow suit,” said Manuel Andersch, an economist at Bayerische Landesbank in Munich. “After all, the SNB has only a few rate cut bullets left. They have to use those last shots wisely.”

The franc had its biggest intra-day decline in six months on Dec. 3, when the ECB cut its deposit rate by 10 basis points and Mario Draghi announced a modest tweaking of its asset-purchase program. The Swiss currency was at 1.08271 per euro at 11:18 a.m. in Zurich on Tuesday, having fallen to a seven-week low after Draghi’s announcement.

“There is a clear risk of a rate cut in Switzerland, but my main scenario is on hold for now,” said Holger Sandte, an economist at Nordea. “The upward pressure on the franc is not huge, and the ECB didn’t cut by a lot last week.”

The SNB will announce the result of its monetary policy decision at 9:30 a.m. on Thursday, and is also forecast to keep its target for three-month franc Libor unchanged, according to the poll conducted after the ECB’s decision. Jordan will elaborate on his thinking at a press conference at 10 a.m. in Bern.

In addition to the negative interest rates, which economists in the survey say could go as low as 1.25 percent if needed, SNB officials have repeatedly pledged that they stand ready to intervene in currency markets.

Intervention Limits

According to the survey, the central bank can allow its assets to climb to 120 percent of gross domestic product, from about 96 percent currently, before its willingness to intervene gets thrown into question. That means the policy makers have about 158 billion francs ($158 billion) of leeway.

When the SNB gave up its 1.20-per euro minimum exchange rate, rate-setters said they were wary of waging ever-larger defensive interventions with little economic benefit. If such cost concerns remain, the central bank does have other options. It could broaden the scope of its negative rate by lowering the exemption limit on sight deposits.

As part of its policy review, the SNB will update its forecasts for growth and inflation. Consumer prices are in the throes of their biggest fall in decades and are set for the foreseeable future to remain well below what the central bank considers price stability -- or a positive inflation rate below 2 percent.

The statistics office cut its 2016 inflation forecast on Tuesday, and now expects consumer prices to fall 0.1 percent next year, down from a prior prediction for a rise of 0.1 percent. It sees CPI increasing just 0.2 percent in 2017.

While the economy has managed to escape recession, output growth unexpectedly stalled in the third quarter, raising a question mark over the SNB’s September forecast for a pick up in economic activity in the latter half of this year.

“Although the SNB’s monetary policy depends on the ECB’s to a large extent, it does not have to replicate every single step,” said Markus Schmieder, an economist at Wellershoff & Partners in Zurich. “Should the appreciation pressure on the Swiss franc increase, we consider interventions as well as a reduction of the exemption threshold more likely responses than lowering the interest rate further.”

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