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The SNB’s policy rate remains unchanged at 0% following the September Governing Board meeting. This was as we expected, matching broad sell-side consensus too, despite a handful of analysts looking for the Bank to take rates into negative territory.
For the time being at least, the bar for such a move looks set to remain high, in keeping with prior comments from SNB Chairman Martin Schlegel. We continue to think the Bank will remain on hold for the foreseeable future, trapped between the zero lower bound on one side, and low inflation and slow growth on the other.
Admittedly, if our view is correct, the SNB could be on hold for some time.
GDP slowed markedly in Q2 after several quarters of solid growth, while US tariffs pose an additional headwind moving forward, with Swiss exports to the US set to face an import levy of 39%. Today’s monetary policy assessment recognised that fact, albeit Chair Schlegel downplayed tariff impacts in his press conference, somewhat to our surprise. Moreover, we think other areas of the Bank’s guidance look a little optimistic as well.
Our preview of today’s decision warned that the Bank’s inflation forecasts look a little high, absent a depreciation of the franc, and these were left little changed from June.
Yet despite the soft macro data and weak economic forecasts, Chair Schlegel reiterated his prior comments, indicating a high bar to take rates into negative territory. Given today’s decision, that threshold is clearly not met by current conditions, despite the slowdown in activity. More interestingly, Schlegel also refused to be drawn on the prospect of FX interventions, even given an unwillingness to consider further policy easing at this juncture.
Putting this together, this looks to us like the Bank is inclined to stand pat, waiting for external conditions to improve, rather than taking a more active approach to boosting the economy, either through the interest rate or the FX channel.
And to be fair, we can see why. Our own base case looks for an improvement in broader European growth conditions over the coming year as rising fiscal spending in the eurozone boosts activity. This should have positive spillovers for the Swiss economy, while also weighing on the franc, helping to reverse the current weakness seen across both GDP and inflation. That somewhat ameliorates the need to ease policy, even if the prospect of higher rates remains some distance away.
As such, our base case continues to look for a slow and steady weakening of the franc as external conditions improve, even as the SNB continues to leave rates unchanged for an extended period.
Author:
Nick Rees, Head of Macro Research