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MNI Point of View: Board likely satisfied with current policy as CHF strength capped for now
With interest rates remaining deep in negative territory and persistent FX intervention boosting total sight deposits to all-time highs, it's likely the Bank are satisfied with this expansionary structure and will keep core policy unchanged in September. Moderating upside pressure on the CHF since June will have alleviated concerns among the governing council, although persistently low inflation remains a drag on policy.
Throughout 2020, the Bank have been quick to make clear that they still have room to manoeuvre on interest rates. But, it's clear that – for the time being - this suite of tools has succeeded in containing financial market fragmentation. As such, the Bank will likely reaffirm their vigilance this quarter, stressing that the CHF is "even more highly valued", but decline to cut rates or expand their current toolkit amid a calmer market outlook.
Figure 1: Pace of weekly FX interventions have slowed materially
Source: MNI/Bloomberg
The pace of FX purchases since the June decision has slowed – the expected response given the recovery in EUR/CHF to trade either side of 1.08. While the bank will still stress that the CHF is overvalued, the governing board are under little pressure to strengthen or expand their language around the currency just yet. Nonetheless, the Bank are likely to stress they stand ready to use FX tools should market sentiment turn again. As such, expect to see these weekly interventions continue and increase in size in the event a second COVID-19 wave pressures EUR/CHF back to 1.05.
On inflation, the Bank do not expect CPI to return to positive territory until well into 2022. These forecasts may be revised very modestly higher this quarter to account for the more stable oil price (and modest import price pressures), but revisions are expected to be minor and retain the expectation of negative inflation for much of the next two years. While that is a cause for concern, the bar for further changes to policy (particularly interest rates) remains high, particularly as intervention via FX and the bank tiering multiplier remain options with which to prevent further financial market fallout.
Switzerland persisted through extended bouts of negative inflation in the wake of crises past, and the SNB will be looking for this wave of deflationary pressure to abate before considering softening their language on the CHF or signalling any change to the sight deposit rate. As such, the risk of any market fallout from the September meeting is low.
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.