The Swiss National Bank held interest rates unchanged on Thursday at its latest policy meeting. It kept its 3-month LIBOR target rate at between -1.25% and -0.25% and the interest on sight deposits with the central bank at -0.75%. The decision was unanimously expected by all economists in both Reuters and Bloomberg surveys, but there was some speculation that the SNB would respond with a counter measure to the ECB’s aggressive easing last week.
The strong value of the Swiss franc has been a major concern for the SNB, which again reiterated today that the currency is “significantly overvalued”. The franc rose sharply against major currencies such as the dollar and the euro after the SNB abandoned the upper ceiling of 1.20 to the euro in January 2015.
The dollar recently peaked above January 2015 levels, though it has since eased somewhat to fall back below parity. It was down sharply today at 0.9688 francs following the SNB’s inaction and the Fed’s downgraded projections on Wednesday. However, the euro is still a long way off 1.20 francs and has only retraced about half of its losses against the Swiss currency following the removal of the upper limit. The euro has been trading around 1.09 francs since August 2015. The franc’s strength against the single currency is a major pain for the Swiss economy as almost half the country’s exports are to the European Union.
As the ECB continues to expand its stimulus measures, the SNB appears to have run out of ammunition with its main rate already deep in negative territory. The central bank has been struggling to get inflation back into positive territory after CPI reversed back into negative at the end of 2014. In February, CPI posted a surprise 0.2% month-on-month increase and this may be a sign of easing deflationary pressures. The SNB is forecasting that inflation will rise to 0.1% in 2017 from an expected rate of -0.8% in 2016.
Economic growth has been less impacted as the knock on exports of the franc’s surge wasn’t as bad as initially feared. However, weak global growth appears to have played a bigger role in dampening export growth. The economy is expected to grow by between 1-1.5% in 2016 following growth of just under 1% in 2015.
Like other central banks, the SNB sees the risks to the outlook for global growth to the downside. With limited room left for manoeuvre with interest rates, the Bank reiterated in its policy statement its willingness to intervene in the foreign exchange market if necessary.
The Swiss franc has strengthened against major currencies since February as the turbulence in global financial markets has increased the demand for safe havens. The SNB has so far declined to reveal whether it has been actively intervening in the markets but given that the uncertainty about the global economy is likely to persist for some time, upside pressure on the franc looks set to prevail in the coming months. Looking at the size of the central bank’s foreign currency reserves, there’s been a steady rise in the SNB’s reserves since December 2014 from around CHF 460 billion to around CHF 570 billion in February 2016, suggesting possible intervention in foreign exchange markets.
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