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10 Dec 2015
SNB holds fire and keeps some ammunition for 2016 - ING
FXStreet (Delhi) – Julien Manceaux, Research Analyst at ING, notes that the Swiss National Bank did not change its monetary policy stance this morning during its quarterly monetary policy meeting.
Key Quotes
“The target range for the 3m Libor remains at -1.25%/-0.25% with a negative deposit rate of -0.75 (the exemption was also left unchanged at 20 times the compulsory reserves). As the ECB did not increased the pace of its quantitative easing policy last week, the prospects of an SNB action this week decreased and the 3m Libor came back at -82bp.”
“For the time being, as markets have been disappointed by Mario Draghi in December, the interest rate spreads between CHF and Euro rates remain ample, ranging from 66bp for the one month and 75bp for the twelve month. The 3m Libor spread stands at 70bp, a level “markedly higher than at the beginning of the year” as President Jordan said this morning, but 30bp lower than in end January 2015.”
“Moreover, the inflation outlook remained broadly unchanged, it even improved in the short-run thanks to more positive than expected exchange rates effects. The main assessment by President Jordan this morning was that “inflation bottomed in the third quarter”. Only the 2017 inflation forecast was revised marginally downwards from 0.4% to 0.3%, but overall the SNB still expects inflation to overcome the 1.0% threshold in mid-2018. In terms of GDP growth, the SNB “continues to expect a slow improvement of the economy. Our forecast for real growth in 2015 is unchanged at just under 1%” (and 1.5% for 2016).”
“However, in the future, one cannot totally exclude that an extension of the current ECB monetary policy will continue to put a downward pressure on the CHF-EUR interest spreads, leading to renewed tensions on the CHF. Moreover, further tensions in the Eurozone itself could also contribute again to abnormally low EUR interest rates, or lead again to CHF appreciating safe-haven purchases. If this were to happen, another rate cut by the SNB could certainly not be excluded in 2016.”
For the time being, the situation certainly does not warrant that and the SNB can limit itself to an active role on the FX market (the SNB’s FX reserves have surged by 100Bn CHF or 25% of GDP in 2015). However, as the pressure on interest rates spreads will continue to be felt, the Swiss monetary policy could certainly ease further again. To be sure, the last ECB move implies that this downward pressure on rates is here to stay: in this context, any normalization of the SNB’s interest rate target will probably have to wait 2017.
Key Quotes
“The target range for the 3m Libor remains at -1.25%/-0.25% with a negative deposit rate of -0.75 (the exemption was also left unchanged at 20 times the compulsory reserves). As the ECB did not increased the pace of its quantitative easing policy last week, the prospects of an SNB action this week decreased and the 3m Libor came back at -82bp.”
“For the time being, as markets have been disappointed by Mario Draghi in December, the interest rate spreads between CHF and Euro rates remain ample, ranging from 66bp for the one month and 75bp for the twelve month. The 3m Libor spread stands at 70bp, a level “markedly higher than at the beginning of the year” as President Jordan said this morning, but 30bp lower than in end January 2015.”
“Moreover, the inflation outlook remained broadly unchanged, it even improved in the short-run thanks to more positive than expected exchange rates effects. The main assessment by President Jordan this morning was that “inflation bottomed in the third quarter”. Only the 2017 inflation forecast was revised marginally downwards from 0.4% to 0.3%, but overall the SNB still expects inflation to overcome the 1.0% threshold in mid-2018. In terms of GDP growth, the SNB “continues to expect a slow improvement of the economy. Our forecast for real growth in 2015 is unchanged at just under 1%” (and 1.5% for 2016).”
“However, in the future, one cannot totally exclude that an extension of the current ECB monetary policy will continue to put a downward pressure on the CHF-EUR interest spreads, leading to renewed tensions on the CHF. Moreover, further tensions in the Eurozone itself could also contribute again to abnormally low EUR interest rates, or lead again to CHF appreciating safe-haven purchases. If this were to happen, another rate cut by the SNB could certainly not be excluded in 2016.”
For the time being, the situation certainly does not warrant that and the SNB can limit itself to an active role on the FX market (the SNB’s FX reserves have surged by 100Bn CHF or 25% of GDP in 2015). However, as the pressure on interest rates spreads will continue to be felt, the Swiss monetary policy could certainly ease further again. To be sure, the last ECB move implies that this downward pressure on rates is here to stay: in this context, any normalization of the SNB’s interest rate target will probably have to wait 2017.