SNB Dodges Latest Draghi Bullet as Franc Gain Proves Temporary

  • ECB cuts all rates, QE boosted to 80 billion a month
  • SNB’s quarterly policy review scheduled for March 17

The Swiss National Bank may avoid having to cut rates again next week after a surge in the franc proved temporary.

The Swiss currency appreciated past 1.09 per euro on Thursday after the European Central Bank cut all its interest rates and expanded monthly bond purchases in an announcement that exceeded most expectations. But the gain was short lived and a comment by President Mario Draghi that the ECB may be done with lowering borrowing costs for now reversed the euro’s decline.

The franc was at 1.09971 per euro at 4:39 p.m. in Zurich -- weaker than its average this year -- after trading as high as 1.08930 earlier.

“As long as the franc remains reasonably stable against the euro, or can be stabilized by interventions, there is no need for the SNB to cut rates.” said Alessandro Bee, an economist at UBS Group AG in Zurich.

Thomas Jordan and his fellow policy makers in Switzerland, who for years have been contending with the fallout from euro-area decisions, will announce their monetary policy decision at 9:30 a.m. on March 17. Economists have speculated the SNB could adapt its current policy either by stepping up currency market interventions or cutting its deposit rate, already at a record low of minus 0.75 percent, even further.

SNB spokesman Walter Meier declined to comment on the ECB decision.

The SNB got off the hook on further easing in December, when ECB Draghi announced a stimulus package that fell short of investors’ expectations. In early 2015, it was the prospect of the ECB embarking upon sovereign bond purchases that led the SNB to give up its cap of 1.20 per euro on the franc. Swiss rate setters, who’ve stated repeatedly that the franc is overvalued, even though it weakened against the franc in the past year, have made clear they haven’t yet reached the end of their rope.

“As the ECB lowered its deposit rate by 10 basis points, the pressure on the SNB to follow suit with a lowering of its own deposit rate is probably not too strong,” said Maxime Botteron, economist at Credit Suisse Group AG in Zurich. “I therefore believe that the SNB can keep its deposit rate unchanged at minus 0.75 percent on 17 March.”

According to Bloomberg’s most recent survey of economists, the SNB can go as low as minus 1.25 percent on the deposit rate before people begin hoarding cash. It also can expand its balance sheet to 128 percent of gross domestic product, from roughly 100 percent now, before its credibility begins to suffer, the poll published on Feb. 15 found.

In addition to another rate cut or more interventions, a change to the exemption limit granted to banks -- currently set at 20 times their minimum reserves -- could be an option.

“So far we do not plan any change, but of course the exemption threshold is a possible policy instrument,” Jordan said on Feb. 27 in Shanghai, where he was attending a Group of 20 meeting. “Both the interest rate and the size of the exemption threshold are policy variables that we have.”

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