SNB to Savor Christmas Quiet Before Year of Europe Suspense

  • Central Bank rate announcement, press conference on Dec. 15
  • European elections, Brexit trigger set to shape in 2017

Thomas Jordan may want to take advantage of any time he gets to put his feet up this holiday season.

While an interest rate increase by the Federal Reserve this week is likely to take pressure off the franc after a year of seismic political shifts, that respite may be short lived. Elections in France, Germany and the Netherlands, plus Britain’s triggering of Brexit, mean 2017 is shaping up to be a year of heightened uncertainty that is set to keep Swiss National Bank President Jordan and his fellow rate setters busy.

“The euro zone will continue to encounter significant problems, keeping the euro low,” said Janwillem Acket, chief economist at Julius Baer. “Erratic U.S. policies, as well as heightened geopolitical tension levels, could be prone to send fearful investors out of the U.S. dollar, as safe haven, into the Swiss franc again.”

The SNB’s policy decision at 9:30 a.m. in Bern on Thursday comes just hours after the Fed is expected to announce its first rate hike in a year on the back of an improving labor market. That could further support the dollar, already lifted along with equity markets by the election of Donald Trump. Policy in the euro area, however, remains expansive, with officials announcing an extension of its bond buying program last week.

“From a Swiss perspective, we have an interest in policy globally moving toward normalization, especially in light of an improvement in the global economy” SNB President Jordan told Tages-Anzeiger newspaper in an interview published on Nov. 24.

Wave of Populism

Economists surveyed by Bloomberg expect the SNB, which has sought to re-kindle inflation via a two-pillar strategy of a deposit rate of minus 0.75 percent and a pledge to intervene in currency markets, to stick with its current stance. Its announcement will be followed by a press conference featuring Jordan, Vice President Fritz Zurbruegg and Board Member Andrea Maechler at 10 a.m. local time.

The SNB will also publish an updated inflation forecast and a first take on growth for next year. In September, it predicted that prices would rise just 0.2 percent in 2017 and 0.6 percent in 2018.

The wave of populism stemming from exasperation with the political and business establishment over a raft of grievances from inequality to immigration that began with Brexit in June and shaped Austria’s presidential election and Italy’s referendum is likely to play a key role in the upcoming European votes and risks destabilizing the euro area.

The Netherlands, something of a laboratory for European politics, with unstable, multi-party coalitions the norm, kicks off Europe’s 2017 voting season with parliamentary elections on March 15. The same month, the U.K. government plans to trigger the start of Brexit via Article 50. The two rounds of the presidential election in France are due in April and May.

Even Germany, whose constitutional checks and balances to prevent dictatorial bents mean it’s considered more resistant to populism, may see the anti-immigration Alternative for Germany party gain ground in federal elections in fall.

See also: The pessimist’s guide to 2017

A reemergence of doubts about the euro’s viability could cause a run on the franc, just as Greece’s debt crisis did in 2015 and Britain’s Brexit vote in June. The SNB admitted interventions after both those incidents, and its foreign-exchange holdings having increased another 39 billion francs ($38.4 billion) in the last five months, indicating there may have been further market activity.

The International Monetary Fund has recommended the SNB reserve its interventions only to counter big inflows and cut its deposit rate still further to combat the strong franc and stoke inflation. According to the median estimate by economists in another Bloomberg survey, the rate can go as low as minus 1.25 percent before investors begin hoarding cash. The SNB can also increase its balance sheet to 150 percent of gross domestic product from roughly 110 percent currently, without risking its credibility, the survey found.

Yet even with the SNB’s ultra-expansive policy, the franc has appreciated more than 1 percent against the euro this year and price pressures are feeble. Last week, Switzerland’s statistics office cut its 2017 consumer price forecast to zero from 0.3 percent, and said it expects inflation to average 0.2 percent in 2018. The franc was up 0.3 percent at 1.0743 per euro at 1:44 p.m. in Zurich on Tuesday.

According to Markus Schmieder, an economist at Wellershoff and Partners in Zurich, the SNB will be hesitant to deploy a further rate cut, shrugging off the IMF’s advice.

“To lower negative interest rates does not seem to be a valid option for the SNB” as bank profits would suffer even more and the risk of cash hoarding would rise, said Schmieder, adding that an improving inflation outlook might allow the SNB to permit the franc to appreciate “in a controlled manner.”

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE