Why the Swiss Central Bank Wants to Keep Traders GuessingBy and
SNB doesn’t follow Fed’s precise language approach: UBS’s Bee
Swiss central bank set to keep policy unchanged on Thursday
If the past is any guide, don’t look to the Swiss National Bank for smoke signals on upcoming policy changes.
While the European Central Bank is tweaking guidance as it gently shifts its stance and Federal Reserve statements are forensically analyzed for clues, the SNB typically paints with a broader brush. Its main buzzwords are “significantly overvalued,” a reference to the strong franc, and an open-ended currency intervention threat.
Switzerland’s central bank, which sent a storm through markets two years ago with a shock policy reversal, has thrown linguistic curve balls in the past. In December, it added a line to its quarterly statement that hinted at a change in thinking, only for President Thomas Jordan to deny any shift, echoing a similar verbal red herring in 2013.
“The SNB doesn’t follow the very precise approach by the Fed and increasingly by the ECB,” said Alessandro Bee, an economist at UBS Group AG in Zurich. “The Fed puts a big emphasis on steering expectations of the market, especially for bonds, and because the SNB’s main focus is the foreign exchange market, they may prefer a bit more surprise.”
While the franc has weakened in the past three months -- reflecting an abating of political risk in Europe -- it remains stronger than 1.10 per euro. It traded at 1.08492 at 9:49 a.m. in Zurich on Tuesday.
Against that backdrop, economists expect no adjustments to interest rates or key policy pronouncements after the SNB’s quarterly meeting on Thursday. That means the deposit rate of minus 0.75 percent and the pledge to intervene if needed to keep the franc in check will remain.
The announcement will come less than a day after the latest Fed meeting, where the U.S. central bank will probably raise interest rates for the second time this year. The Bank of England and the Bank of Japan are both forecast to keep monetary policy unchanged at meetings this week.
Data suggest the SNB intervened this year to curb the franc’s rise. Although the spread between Swiss and German bond yields has widened in recent weeks following the election of centrist Emmanuel Macron to the French presidency, it’s still narrower than in 2015 and 2016, a sign there is still pressure on the currency.
“The SNB is still very far away from changing its monetary policy,” said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “The upward pressure on the franc continues as interest-rate differentials with the euro area are still very small.”
The ECB last week dropped its guidance that rates might fall further, a sign it’s moving closer to an exit from the stimulus program that was a factor in the SNB’s 2015 decision to scrap its franc cap of 1.20 per euro. Still, President Mario Draghi argued that inflation isn’t yet strong enough to warrant any removal of monetary accommodation.
Those changes in language won’t affect the SNB’s stance this week, according to a Bloomberg survey of economists.
The Swiss central bank will update its forecasts on Thursday. It currently sees the economy growing about 1.5 percent this year, with consumer prices expected to accelerate through 2019.
In what may be a signal that the SNB won’t make any big adjustments, Switzerland’s Federal Statistics Office kept its 2017 inflation forecast unchanged at 0.5 percent this week.
“The change in the ECB’s stance is much too small for the SNB to base any change in its own policy on at this point,” IHS Markit Economics’ Timo Klein said. “In particular, the timing and speed of ECB tapering and future rate hikes remains very uncertain, so the SNB will prefer to wait-and-see.”
— With assistance by Josh Robinson