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9 Dec 2015
After ECB 'shocker', SNB might choose to 'wait and see'
FXStreet (Mumbai) - After the smaller than expected package announced by the European Central Bank on 3rd December, markets have their eyes set on the Swiss National Bank’s (SNB) meeting tomorrow. Barclays expect the SNB to take a "wait and see" approach when it meets tomorrow. The market consensus is for no change to policy.
ECB’s policy has always been watched closely by the SNB to chart their own. Given that Switzerland is surrounded by euro countries, it has always helped the Swiss central bank to pay attention to the bloc’s policies.
The ECB disappointed the market last week by only cutting the deposit rate by 10 basis points and by extending QE by 7 months. QE was not expanded. The SNB had implemented negative interest rates previously in order to maintain the EU and Swiss rates difference. With ECB’s policy out, SNB too might now choose to disappoint by holding rates steady.
Barclays explained, “When we originally proposed that the SNB would remove the exemption from negative deposit rates for the majority of domestic banks' sight deposits - its "nuclear" option - it was conditional on the ECB taking aggressive action that would increase downside pressure on EURCHF
Why an interest rate cut may be on the cards?
Like other major economies Switzerland too is plagued by poor inflation. Currently, inflation stands at -1.4 per cent. Inflation has suffered further post the removal of the price floor between the Euro and the Franc. The SVME PMI has also contracted standing at 49.7, down from 50.7; while retail sales too are an issue at -0.8% y/y. GDP data released last week showed growth stagnated quarter on quarter, falling below 0.2 per cent market expectation.
The SNB intervened to weaken the currency when it appreciated slightly post ECB’s announcement on 3rd December. From this intervention it is evident that the SNB wants a weaker currency and this weakening will be possible only if rates are slashed further. Barclays also sees further depreciation of the CHF against the USD and the EUR.
ECB’s policy has always been watched closely by the SNB to chart their own. Given that Switzerland is surrounded by euro countries, it has always helped the Swiss central bank to pay attention to the bloc’s policies.
The ECB disappointed the market last week by only cutting the deposit rate by 10 basis points and by extending QE by 7 months. QE was not expanded. The SNB had implemented negative interest rates previously in order to maintain the EU and Swiss rates difference. With ECB’s policy out, SNB too might now choose to disappoint by holding rates steady.
Barclays explained, “When we originally proposed that the SNB would remove the exemption from negative deposit rates for the majority of domestic banks' sight deposits - its "nuclear" option - it was conditional on the ECB taking aggressive action that would increase downside pressure on EURCHF
Why an interest rate cut may be on the cards?
Like other major economies Switzerland too is plagued by poor inflation. Currently, inflation stands at -1.4 per cent. Inflation has suffered further post the removal of the price floor between the Euro and the Franc. The SVME PMI has also contracted standing at 49.7, down from 50.7; while retail sales too are an issue at -0.8% y/y. GDP data released last week showed growth stagnated quarter on quarter, falling below 0.2 per cent market expectation.
The SNB intervened to weaken the currency when it appreciated slightly post ECB’s announcement on 3rd December. From this intervention it is evident that the SNB wants a weaker currency and this weakening will be possible only if rates are slashed further. Barclays also sees further depreciation of the CHF against the USD and the EUR.