September Timing of a First Swiss Rate Hike Much More Probable Than June

March 11, 2010

The Swiss National Bank retained a 0.25% target on three-month Libor within a 0.0-0.75% corridor.  Last September, officials served notice that the present expansionary stance cannot be maintained for the entire forecast horizon without compromising medium- and long-term price stability, and quantitative easing was ended last December.  Today’s new quarterly SNB Monetary Policy Assessment does not include additional language that one would expect to find if a rate hike as soon as June was a serious possibility.  The signals in this new report are mixed.  Several imply no rate hike before September at the earliest.

  • Although Swiss economic activity since December was more robust and broadly balanced than anticipated in the prior report, the economic performance elsewhere in Europe “has been disappointing.”  Depressants like high unemployment and bleak public finance situations create considerable uncertainty in the outlook.
  • The franc’s appreciation against the euro has tightened Swiss monetary conditions without any change in SNB rates.
  • Because of the FX-related tighter monetary conditions, the path of Swiss inflation from mid-2011 through at least 3Q12 has been revised downward.  On-year CPI inflation is expected to trend downward from 0.95% this quarter to a trough of 0.52% in the final quarter of 2010.  Such doesn’t climb back above 1.5% in any quarter of 2011 and only gets to 2.07% in 2Q12 even if the SNB rate were to stay at 0.25% that whole time.  Calendar year average inflation will be less than 1.0% both this year and next.
  • The report explicitly calls the 0.25% Libor “the desired level” and opines that deflationary risks have still not been entirely snuffed out.

The central bank assessment is noteworthy on two other counts.  For one thing, projected Swiss GDP growth in 2010 is revised to 1.5% from an estimate of 0.5-1.0% made in December.  The other point concerns Swiss franc appreciation.  Gains on the euro were the reason for the lower projected inflation vector, and the report reiterates that excessive CHF/EUR appreciation will be countered decisively with intervention.  Some such operations appear to have occurred just yesterday.  But the term “excessive” is not clarified in a quantitative way.  When a franc stabilization policy began a year ago, the intent was to weaken the franc from 1.46 per euro to beyond 1.50 and to make sure it didn’t strengthen through that level again.  After nine months of that full-court press, officials gave markets a wink in Decemberr that was understood to mean that the 1.50 level would no longer a line in the sand that mustn’t be crossed.  And so markets probed the franc’s upside scope and found little serious resistance until the cross rate returned to 1.46. 

For public record, officials maintain that no specific franc level is sacrosanct but have consistently acted around 1.46.  Switzerland does not share Euroland’s fiscal shortcomings.  It is not a member of the European Monetary Union, and the budget, which chronically has been in surplus, shows a very manageable deficit now of less than 2% of Swiss GDP.  Even in the December assessment, a difference between Switzerland and other European economies was drawn in that Switzerland had no credit crunch and that mortgage finance was perhaps already too loose.  Those points were again made in the new report.  The Swiss current account surplus moreover exceeds 7% of GDP.  Putting all these solid economic fundamentals together, upward pressure on the franc seems likely to persist for the foreseeable future, and monetary officials will have discretion over how the tightening of monetary conditions is shared between franc appreciation and higher interest rates. To avoid asset bubbles, it would be irresponsible to take the adjustment mostly from the currency, so intervention may have to stiffen.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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