Swiss Monetary Officials Need to Be Taken Very Seriously

June 25, 2009

Policy makers at the Swiss National Bank hold just four policy meetings per year in the middle of the final month of each calendar quarter.

In March, the target interest rate (three-month Swiss Libor) was lowered to 0.25%, as far as it can realistically go.  But officials  felt that doing that alone would not adequately contain the mounting risk of deflation.  A major future deflationary threat was the appreciating franc, which had climbed from 1.655 per euro at the start of 2008 to 1.4300 late last October and which at 1.4580 was again challenging to take out that peak.  Not for the first time, Swiss officials subordinated domestic monetary policy to an exchange rate goal to prevent any additional appreciation against the euro.  The threat of intervention was thrown on the table and backed up with actual franc sales.

Markets perceived 1.50 per euro to be the pain threshold of Swiss officials and still do.  The franc initially popped up as high as 1.5443 on March 17th but had been grinding closer to 1.50 more recently.  The franc since the initial policy announcement in March has averaged 1.5172 compared to a mean of 1.4893 this year prior to the announcement and 1.5867 for all of 2008. 

Swiss officials reiterated and escalated their commitment to a softer franc at last week’s quarterly policy meeting.  To underscore the seriousness with which they view the risk of deflation, consumer price inflation was projected at negative 0.5% this year, positive 0.4% in 2010, and positive 0.3% in 2011.  Intervention since that meeting has been heavier and conducted against the dollar as well as the euro and by the Bank for International Settlements as well as the Swiss National Bank.

Pierre Roth, head of the SNB, recently cautioned that intervention operations are not anchored around the defense of a fixed parity level.  Many took this as a tactical modification, so that intervention policy would remain unpredictable to speculators.  I suspect the remark has a strategic element as well.  In March, officials may have been satisfied if they could keep the franc on the soft side of 1.50 per euro, but that is probably no longer true because of the greater danger of negative price inflation.  The CPI fell 1.0% in the year to May, and even by the first quarter of 2012, the baseline inflation forecast of SNB officials climbs to only +0.65%. If, as I believe, officials would like to see the franc average closer to 1.55 than 1.50 per euro in order to secure a bigger safety cushion, it might help to think of depressing the currency beyond 1.55 sometime within the coming 12 months.  Since the franc averaged close to 1.59 in 2008 and in light of the very negative rate of real Swiss GDP growth (down 2.4% in 1Q from a year earlier and -16% saar that quarter), such a plan would surely not represent a tactical over-reaction to the present reality.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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