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The Swiss National Bank held rates on Sight Deposits at 1.75% for the second consecutive meeting, in line with our expectations and the broad market consensus after realised inflation consistently undershot the central bank’s Q4 forecast from September.
With a move on rates highly unlikely, most of the attention was on the SNB’s view on the Swiss franc, having introduced language in March of this year that it is actively intervening in favour of CHF appreciation. While the SNB maintained that it will take an active role in FX markets, it notably removed reference that it continues to intervene in favour of CHF appreciation, with Governor Jordan noting that the SNB is “no longer focusing on foreign currency sales” in the press conference.
This again meets our pre-release expectations as we noted that just north of 0.94, further franc appreciation against the euro amidst a weaker external growth and inflation environment posed a recession and deflation risk in Switzerland.
While the SNB stopped short in acknowledging this directly, the removal of language in favour of further policy tightening through a stronger franc coincides with a relatively weak growth forecast for 2024 and a significant downgrade in the Bank’s overall inflation trajectory. Publishing forecasts for growth for the first time, the Bank sees the economy slowing from a current rate of 1% to a pace of 0.5-1% next year, while it now sees inflation averaging below its 2% ceiling a year earlier than it did a quarter ago.
Since the SNB raised rates to 1.75%, it has progressively downgraded its inflation forecasts
Overall, today’s SNB decision suggests that the central bank is sensitive to the prospect of EURCHF nosediving below the 0.94 handle on a more dovish ECB or increased recession risks in the eurozone.
With the central bank notably active in FX markets and retaining this position in today’s press release, this reintroduces two-sided FX intervention risk for markets, a dynamic that we expect will keep EURCHF supported around our 0.95 year-end forecast over the ECB decision this afternoon and release of eurozone flash PMIs on Friday. Furthermore, given the SNB’s updated inflation forecasts, which now have inflation averaging 1.9% next year and 1.6% in the following year, we think it is only a matter of time until rate cuts come into scope for the central bank. Our base case currently doesn’t expect a rate cut until June, owing to the central bank’s tolerance for low levels of inflation. In the interim, we expect the SNB to control policy through balance sheet measures. This will likely include active FX intervention and potentially even an increase in the exemption of excess deposits from the deposit rate in March.
However, there is a risk that given the weak run rate of underlying inflation the SNB will cut rates as soon as March. However, we expect this only to occur if the ECB turns markedly more dovish in Q1, adding to CHF appreciation pressures, and imports continue to exert deflationary pressure.
The weak underlying run rate of inflation poses a risk the SNB starts to cut rates as early as March
Author:
Simon Harvey, Head of FX Analysis