SNB Sticks With Record-Low Rates and Intervention Threat

  • Deposit rate stays at -0.75%, SNB restates intervention pledge
  • Brexit, French election could trigger flight into franc

The Swiss National Bank kept its deposit rate at an historic low and reaffirmed its threat to intervene to keep a lid on the franc.

Keen to prevent the currency from appreciating, SNB President Thomas Jordan and his colleagues held the interest rate on sight deposits at minus 0.75 percent on Thursday, as forecast in a Bloomberg survey. They also repeated their pledge to wage foreign-exchange interventions if needed, saying the franc remained “significantly overvalued”.

The decision to maintain its ultra-loose policy comes just hours after the U.S. Federal Reserve raised rates. That tightening is unlikely to prove much of a reprieve for the Swiss, whose currency is considered a haven. An increase in risk aversion due to political events in Europe could send investors flocking into the franc once again.

“It’s still the case that they are seeing a better economic picture both in Switzerland and internationally, but they also see risks from European politics, the U.S. and Brexit,” said UBS Group AG economist Alessandro Bee. “In the next few weeks, France will likely be top of the agenda -- the more likely a Le Pen election seems, the more the SNB will have to act.”

Earlier this month, Jordan said periods of political uncertainty were always “delicate” for his country. He cited elections in Germany and France, possible instability in Italy, and questions about the U.K.’s exit from the European Union and U.S. trade policy under President Donald Trump.

Political Risks

Following Wednesday’s parliamentary vote in the Netherlands in which Prime Minister Mark Rutte easily beat off an election challenge by populist Geert Wilders, the Britain’s formal announcement of a departure from the EU -- expected to take place by the end of this month -- could cause the central bank to intervene again, as it did in the wake of last year’s Brexit referendum and at the height of the Greek debt crisis. So could a win by euro-skeptic Marine Le Pen in France’s presidential election in May.

While apprehension among investors about European politics or U.S. protectionism may keep the SNB active in markets, Switzerland appears to have overcome an episode of falling consumer prices.

This year is to be the first since 2011 with a positive annual inflation rate, according to SNB projections. It now foresees a rise of 0.3 percent in the consumer-price index, up from a forecast of 0.1 percent in December. For 2018, it predicts an increase of 0.4 percent, followed by 1.1 percent in 2019.

Those are levels that meet the SNB’s definition of price stability. Yet as in the euro area, the uptick is due to higher energy costs and the core inflation rate is much weaker, suggesting that underlying price pressures remain subdued.

“2018 seems that it may be the year for the SNB to start normalizing policy,” said Nadia Gharbi, an economist at Pictet & Cie in Geneva.

The central bank has in the past justified its currency-market interventions -- which have caused its foreign-exchange holdings to balloon to 668 billion francs ($669 billion) -- by saying they were needed to ward off deflationary pressures. Data for sight deposits indicates the SNB picked up its market activity last month.

The franc is little changed against the euro this year, while against the dollar it is up about 1.9 percent, according to data compiled by Bloomberg. The currency traded 0.2 percent higher against the euro at 1.07112 at 10:02 a.m. in Zurich, while it stood at 1.0002 against the dollar.

Meanwhile, the pace of economic momentum is likely to pick this year, indicators such as the KOF barometer and purchasing managers’ index show. The SNB forecasts an increase in gross domestic product of about 1.5 percent this year, in line with its December forecast.

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