The Swiss National Bank left its 3-month Libor target band unchanged at -1.25% to -0.25%, with the sight deposit rate left at -0.75%, in line with the universal consensus.
All eyes were on the SNB’s rhetoric surrounding the CHF. The central bank tweaked its comments on the domestic currency stating that “recent development is reducing, to some extent, the significant overvaluation of the CHF,” although it did note that the currency is still “highly valued.” This represented a slight departure from its heavily worn “significantly overvalued” phrasing. The central bank also reiterated its pledge to intervene in FX markets if needed and that the presence of a negative interest is “essential.”
The change in rhetoric had been heavily debated by the analytic community running in to today’s decision, with the CHF trading circa 5% lower against the EUR pre-decision, when compared with June’s meeting levels, although it was higher against the USD over the same horizon. The change was somewhat telegraphed by SNB chairman Thomas Jordan earlier in September, when he noted that the “recent weakening has eased the CHF’s overvaluation,” though he said the “CHF situation is still fragile,” and he was “unsure whether the weakening would be sustained.” Jordan’s comments followed similar remarks from SNB-voter Andrea Maechler, who also noted that “the weakening of the CHF is welcome but the situation is fragile.”
The SNB made modest upward revisions to its inflation forecasts, with core inflation sitting at the highest levels seen since January 2015, when the SNB removed the CHF ceiling against the EUR.
The move in the central bank’s GDP forecast was more notable (but predictable given the soft Q2 Swiss GDP reading). The SNB noted that “owing to weak GDP momentum in late 2016/early 2017, the current year is likely to see growth of just under 1.0%. At its monetary policy assessment in June, the SNB was still expecting growth of roughly 1. 5%. The lower forecast is attributable to the weak GDP figures for the previous quarters.”
CHF price action was choppy post-decision with EURCHF operating in a 1.1435-1.1495 range, after beginning the meeting around 1.1465, but we ultimately edged higher in both the EURCHF and USDCHF.
Looking forwards, now that inflation is in positive territory (although it remains very muted) and the CHF has begun to weaken, many are questioning when will the SNB tighten policy? UBS argues that it will be contingent upon the ECB, and specifically, when the ECB ends its asset purchase programme, as well as further franc weakness. UBS’ current base case looks for a rate hike in 2018, while they suggest that today’s decision “is not yet a sign that a monetary policy switch lies in store, since they said the foreign currency market situation remains fragile. They’d want to see the weaker CHF become sustainable before they adjust monetary policy.” Credit Suisse believe that the SNB will “be very happy if this situation persists of a somewhat weaker CHF. That will simply mean that they don’t have to intervene any more, but actively they will not do anything in our view. They will certainly not move interest rates in our view ahead of the ECB.”
ING also believe SNB action is heavily contingent on ECB policy, suggesting that “after all the ECB broke the SNB’s EURCHF floor in January 2015 when it introduced QE, so it can fix an over-valued CHF by tapering. As such we expect the SNB to be at least twelve months behind the ECB in normalising policy – suggesting that if the ECB were to raise the deposit rate in late 2018, the SNB would not raise its 3m CHF Libor target of -0.75% until late 2019.”