The Swiss National Bank today announced that they would keep their ultra-loose monetary policy framework untouched by holding the policy rate at -0.75%. What was more pressing for financial markets, however, was the language around CHF intervention given the EURCHF rate briefly dipped below parity for the first time since 2015 at the start of the month.
In line with the inter-meeting commentary, today’s rate statement included the commitment by the central bank to “intervene in the foreign exchange market as necessary”, despite the weakening in the Swiss franc in both nominal and real terms since the breach and signs of intervention. Recent history tells us that although the SNB states that it assesses the franc’s strength on a trade-weighted and inflation-adjusted basis, much focus still remain on the EURCHF nominal rate. In this regard, today’s announcement by the SNB was a warning call to markets. Although the EURCHF rate currently sits 2.38% above parity, and the inflation differential between the Swiss economy and the eurozone is wide, the SNB are likely to draw a line in the sand at a higher level than parity – the point at which markets assumed the SNB last intervened.
Our view that the SNB’s tolerance level, outside of extreme market strain, has risen to around the 1.01 level on EURCHF was partially confirmed by the SNB’s latest forecasts.
The central bank now expects growth in 2022 to average 2.5%, down from 3%, while the inflation forecast has been revised up from 1% this year to 2.1%. While this sees inflation above the 2% target this year, the central bank’s forecast for CPI in 2023 and 2024 of 0.9% provides the rationale to keep policy loose. Should the central bank wish to exit negative interest rates over the medium-term horizon, in line with the global tightening of monetary policy, the central bank will need to offset a “highly valued” currency should markets continue to trade the EURCHF rate at or near historical lows.
SNB’s line in the sand on EURCHF is likely to have risen above parity now extreme market volatility has died down, FX intervention still viable despite the weakening of the franc over past weeks
Simon Harvey, Head of FX Analysis