Login
The Swiss National Bank today cut its policy rate by 25bps to 1.5%, making it the first G10 central bank to cut rates this cycle.
While we believed the SNB would take such action following its dovish pivot back in December, we recently pushed back our call for a cut until June based on strength in domestic services growth, the impact this was having on near-term measures of services inflation, recent depreciation in the franc in both nominal and real terms, and the hawkish shift amongst DM central banks on concerns of inflation persistence. However, despite acknowledging strength in services activity and inflation, the SNB stressed the impact real appreciation in the Swiss franc over the past year was having on its manufacturing sector and goods inflation to motivate its decision to cut, a point made by President Jordan at a banking event in late January in an attempt to weaken the franc. With EURCHF having rallied 2.5% since Jordan’s comments, today’s decision suggests that the franc’s underperformance year-to-date isn’t substantial enough for the SNB’s liking; a message the FX market has received loud and clear this morning.
The SNB’s cut works its magic as EURCHF jumps above 0.97
We also think today’s decision to cut is motivated by the SNB’s preference to avoid FX intervention between meetings.
Not only have previous periods of intervention proven politically sensitive after the franc appreciated and resulted in the SNB recording operational losses in the past two years, but FX intervention to depreciate the domestic currency is also less effective in periods where the monetary stance is restrictive. Unlike in 2020-2021 when the SNB intervened aggressively to weaken the franc, interest rates are now positive, meaning FX purchases must be sterilised to avoid expanding the monetary base and fuelling inflation. Sterilised intervention is estimated to be less effective, and with the SNB already concerned around the risk of imported deflation, today’s decision to cut suggests they don’t want to take this risk in Q2.
SNB forecasts inflation comfortably within target range based on a policy rate of 1.5%, motivating their decision to cut
We also think today’s decision to cut is motivated by the SNB’s preference to avoid FX intervention between meetings. Not only have previous periods of intervention proven politically sensitive after the franc appreciated and resulted in the SNB recording operational losses in the past two years, but FX intervention to depreciate the domestic currency is also less effective in periods where the monetary stance is restrictive. Unlike in 2020-2021 when the SNB intervened aggressively to weaken the franc, interest rates are now positive, meaning FX purchases must be sterilised to avoid expanding the monetary base and fuelling inflation.
Sterilised intervention is estimated to be less effective, and with the SNB already concerned around the risk of imported deflation, today’s decision to cut suggests they don’t want to take this risk in Q2.
SNB forecasts inflation comfortably within target range based on a policy rate of 1.5%, motivating their decision to cut
For the franc, today’s decision to cut has different implications in the short and medium-term. In the coming quarter, the SNB’s decision to lead the DM easing cycle confirms the franc’s status as the most viable G10 funding currency, both due to its lower rates and the SNB’s intolerance towards further CHF appreciation. This should see the franc continue to underperform over the course of the second quarter. However, the SNB’s proactive approach is unlikely to spur significant near-term depreciation over this timeframe. As mentioned, by cutting rates early, inflation readings in Q2 are likely to overshoot the SNB’s projections than undershoot them, meaning future decisions to ease are unlikely to be as clearcut as they are for peer central banks. This should see EURCHF trend to and trade around 0.98 in Q2, as per our March forecasts.
However, while we expect the franc to continue weakening, today’s decision suggests the overall trend of CHF depreciation is likely to be shallower. By taking a more pragmatic approach, the terminal rate in Switzerland is likely to be higher than anticipated. While this doesn’t alter our view that EURCHF will return to parity by year-end, franc depreciation beyond this point towards the 1.05 region is unlikely.
Author:
Simon Harvey, Head of FX Analysis