MNI STATE OF PLAY: SNB To Hold As CPI Tops 2%, EURCHF Firms

The Swiss National Bank is expected to keep its expansionary monetary policy on hold on Thursday despite inflation running slightly above its definition of price stability, and to repeat its willingness to intervene in foreign exchange markets following the franc’s recent breach of parity with the euro.

Though headline inflation was 2.2% in February, higher than the under-2% price stability definition, in December it forecast this to average only around 1.0% for the year. The pace of wage increases is also modest, leaving the SNB under less pressure to raise the policy rate and interest on sight deposits - currently set at −0.75% - than the European Central Bank, let alone the Federal Reserve or the Bank of England.

A surge of what the SNB described as safe haven flows after the Russian invasion of Ukraine sent EURCHF briefly below parity for the first time on March 7, prompting it to repeat its intention to intervene if necessary, and to note that the franc is “highly valued.”

But it stressed that higher inflation in other countries was also driving flows into the franc, and added that it looked at the currency’s overall valuation, and not just against the euro. The franc has weakened against the dollar since the SNB’s last meeting on Dec. 16.

In December, President Thomas Jordan said the SNB had been able to prevent a stronger rise in inflation “by allowing a certain amount of nominal appreciation" in the exchange rate.

GROWTH OUTLOOK

Switzerland’s economy is expected to grow by 2.8% in 2022, according to the State Secretariat for Economic Affairs, down from December’s 3% prediction, though some analysts are less optimistic, citing the contractionary economic effect on the country’s main regional trading partners of the ongoing war in Ukraine.

December’s announcement that SNB second-in-command Fritz Zurbruegg will step down in the summer means there will also be press scrutiny regarding the identity of his successor, ahead of what is likely to be a highly-politicised search.

The SNB has also said it is examining whether it must sell security holdings related to Russia with a value of less than 0.05% of its currency reserves in compliance with sanctions.