SNB Review - June 2020: ECB On Autopilot As The List of Questions Grow

At June's meeting, SNB President Jordan reiterated the Bank's confidence and conviction in their current set of policy tools. The Bank see deeply negative policy rates, currency intervention and the COVID-19 Refinancing Facility (CRF) protecting the economy, providing ample liquidity and underlying inflationary conditions.

Despite this conviction, the SNB are now forecasting the most dire set of inflation projections since the Global Financial Crisis with Switzerland now seen in deflation for the next two years.

Unchanged policy in June twinned with the outright deflationary forecast will lead markets to factor out the possibility of further rate cuts from the SNB. While the Bank explained away the downside pressure as being due to "significantly weaker growth prospect and lower oil prices", markets will now begin to speculate just how much worse the outlook needs to get before more action is warranted.

The SNB cited their baseline scenario as anticipating "that further waves of infection will be successfully prevented" with the caveat that forecasts are "subject to a high level of uncertainty on the upside and downside" which may buy the bank some wiggle room should they wish to tweak policy in the coming quarters.

On currency markets, the SNB note that early appreciation in the CHF was countered by SNB intervention as well as European recovery fund proposals, reaffirming their satisfaction and conviction in their FX policy tools. This should reassure markets that the SNB will continue to prevent any further slides through 1.05 in EUR/CHF.

Similarly, any domestic concerns over the impact of negative rates have been soothed among SNB policymakers by the increase in the negative rate exemption thresholds earlier this year. The SNB noted that around 75% of bank sight deposits don't fall under the negative rates anyway, thereby reducing materially any pressure for banks to apply negative rates to small savers. This tiering exemption multiple remains one of the tools the SNB could adjust to either stimulate a flagging domestic economy or put the brakes on a swift recovery while keeping the key policy rate unchanged and in negative territory for the coming years.