Switzerland: SNB to keep on expanding its balance sheet - ING

There were no big surprises this morning in Bern as the SNB left its target for CHF 3-month Libor unchanged while FX interventions will continue as the CHF is still considered to be significantly overvalued, explains Geoffrey Minne, Economist at ING.

Key Quotes

“As widely expected by the financial markets, the Swiss National Bank decided not to tilt its monetary policy. The target range for CHF 3m Libor remains at -1.25%/-0.25% with a negative deposit rate of -0.75%. SNB President Jordan reiterated that the “expansionary monetary policy remains necessary in order to ensure price stability, while taking due account of economic developments”.”

“Looking at SNB forecasts, it seems that the Swiss economy struggles to translate more robust economic momentum into inflationary pressure, as it is the case for most developed economies currently. The labour market is strengthening but at a very slow pace and therefore wage pressures on inflation remains subdued. Inflation forecasts were left unchanged for this year (0.3%) but revised downwards for the next two years (from 0.4% to 0.3% for 2018 and from 1.1% to 1% for 2019). As for GDP, even if the SNB continues to forecast a moderate growth rate (1.5% in 2017), it hinted that the economy could experience a slightly more robust momentum in the next quarter, on the back of the services and the construction sectors.”

“Since the beginning of the year, we cannot say that the conditions have changed dramatically and that the pressure on the CHF has already faded away. The Swiss Franc is still considered to be significantly overvalued (as in March and December last year). Therefore the SNB continues to intervene heavily “to make Swiss franc investments less attractive”. In the first four months of the year, the assets pertaining to foreign currency investment have increased by 34 billion CHF (amounting to CHF730bn in April 2017). To compare, the increase was CHF103bn in 2016 and CHF83bn in 2015.”

“For the SNB, there is more than enough reason not to move its stance and to remain careful: the ECB’s sluggish normalisation path, the effectiveness of the exchange rate policy or international politics. Indeed, both Italian and global politics remain risks and it remains easy to imagine a political accident triggering a stronger demand for safe havens like the CHF. President Jordan noticed that the pressure on the CHF increased the days before French elections. The SNB baseline scenario “continues to be subject to considerable downside risks because of “political uncertainty and structural problems in a number of advanced economies”.”

“All in all, the strategy of the SNB has until now proven to be viable under current conditions but clearly the SNB will wait for the ECB to move before considering any change. As the ECB starts to think about slowly watering down its quantitative easing programme in 2018, the SNB could expect the upward pressure on the CHF to diminish (very) slowly next year. We currently expect the EUR/CHF to reach 1.15 in 2Q18. That said, because political risks are still surrounding the Eurozone scenario, it is definitely too early to receive an all-clear and to cut FX interventions.”