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11 Dec 2015
CHF: SNB on hold, observing further ECB actions – Goldman Sachs
FXStreet (Delhi) – Research Team at Goldman Sachs, notes that the SNB kept policy rates unchanged at its December monetary policy assessment and expressed its readiness to thwart appreciation pressures on the CHF as necessary.
Key Quotes
“The SNB stressed its general willingness to ease policy further, although the current interest rate differential vis-à-vis the ECB is judged sufficiently large to make the CHF “less attractive” and therefore ease pressure on the CHF. The medium-term inflation forecast was revised slightly lower. The Swiss Franc strengthened on the SNB’s decision, but depreciated subsequently.
• While taking note of the depreciation of the Swiss Franc in recent months, the Governing Board continues to view the CHF as “significantly overvalued”, but still expects the combination of (i) negative rates and (ii) interventions in the FX market to exert downward pressures on the Franc.
• The SNB struck a “cautiously optimistic” tone regarding the outlook for the global economy, but insisted that there were “significant [downside] risks” to that view. Swiss real GDP growth came to a halt in the third quarter. However, the SNB sees temporary factors at work and expects the economy to accelerate again next year to +1.5% after +1.0% for 2015. During the press conference, Mr Jordan expressed confidence about the overall flexibility of the Swiss economy and its ability to adjust to a difficult environment.
• The SNB’s conditional inflation forecasts were revised higher in the shorter term and slightly lower at longer horizons. In particular, the SNB expects annual headline consumer price inflation to reach -1.1% in 2015 (+0.1pp), -0.5% in 2016 (unchanged) and +0.3% in 2017 (-0.1pp).
• In the press conference, Mr Jordan made clear that the lower interest rate differential with the ECB (which resulted from last week ECB’s decision to cut its deposit facility rate by 10bp) was still viewed as sufficiently large to make the CHF “less attractive”. Accordingly, the SNB expects the CHF to weaken further as its foreign market interventions and the negative interest rate “are intended to ease pressure on the Swiss franc”.
• Mr Jordan declined to comment on whether the Governing Board had discussed the eventuality of an interest rate cut, but stressed that further cuts would be an option. However, Mr Jordan also pointed to the negative side effects of a further reduction in rates, and noted that the SNB would need to assess the risk/benefit ratio of any further easing. Finally, the SNB released data indicating that around CHF170bn of sight deposits of banks at the SNB were subject to the negative interest rate.
• The Swiss Franc appreciated notably against the Euro on the SNB’s decision, but lost most of its gains shortly after. This pattern may reflect the SNB’s intervention in the FX market (Exhibit 2). The CHF swap curve re-priced significantly in the run-up to the SNB’s December meeting; most of the price action was likely driven by the market’s disappointment in the face of the ECB’s decision to cut its deposit facility rate by 10bp at is December meeting.
• Looking ahead, we think the SNB will remain in a wait-and-see mode and not seek to ease monetary policy proactively – at least not beyond one-off interventions in the FX market. Rather, we think the SNB will prefer to respond to policy moves by other central banks, in particular the ECB.”
Key Quotes
“The SNB stressed its general willingness to ease policy further, although the current interest rate differential vis-à-vis the ECB is judged sufficiently large to make the CHF “less attractive” and therefore ease pressure on the CHF. The medium-term inflation forecast was revised slightly lower. The Swiss Franc strengthened on the SNB’s decision, but depreciated subsequently.
• While taking note of the depreciation of the Swiss Franc in recent months, the Governing Board continues to view the CHF as “significantly overvalued”, but still expects the combination of (i) negative rates and (ii) interventions in the FX market to exert downward pressures on the Franc.
• The SNB struck a “cautiously optimistic” tone regarding the outlook for the global economy, but insisted that there were “significant [downside] risks” to that view. Swiss real GDP growth came to a halt in the third quarter. However, the SNB sees temporary factors at work and expects the economy to accelerate again next year to +1.5% after +1.0% for 2015. During the press conference, Mr Jordan expressed confidence about the overall flexibility of the Swiss economy and its ability to adjust to a difficult environment.
• The SNB’s conditional inflation forecasts were revised higher in the shorter term and slightly lower at longer horizons. In particular, the SNB expects annual headline consumer price inflation to reach -1.1% in 2015 (+0.1pp), -0.5% in 2016 (unchanged) and +0.3% in 2017 (-0.1pp).
• In the press conference, Mr Jordan made clear that the lower interest rate differential with the ECB (which resulted from last week ECB’s decision to cut its deposit facility rate by 10bp) was still viewed as sufficiently large to make the CHF “less attractive”. Accordingly, the SNB expects the CHF to weaken further as its foreign market interventions and the negative interest rate “are intended to ease pressure on the Swiss franc”.
• Mr Jordan declined to comment on whether the Governing Board had discussed the eventuality of an interest rate cut, but stressed that further cuts would be an option. However, Mr Jordan also pointed to the negative side effects of a further reduction in rates, and noted that the SNB would need to assess the risk/benefit ratio of any further easing. Finally, the SNB released data indicating that around CHF170bn of sight deposits of banks at the SNB were subject to the negative interest rate.
• The Swiss Franc appreciated notably against the Euro on the SNB’s decision, but lost most of its gains shortly after. This pattern may reflect the SNB’s intervention in the FX market (Exhibit 2). The CHF swap curve re-priced significantly in the run-up to the SNB’s December meeting; most of the price action was likely driven by the market’s disappointment in the face of the ECB’s decision to cut its deposit facility rate by 10bp at is December meeting.
• Looking ahead, we think the SNB will remain in a wait-and-see mode and not seek to ease monetary policy proactively – at least not beyond one-off interventions in the FX market. Rather, we think the SNB will prefer to respond to policy moves by other central banks, in particular the ECB.”