SNB Tipped to Avoid Copying ECB and Cut Interest Rates - Despite Lowest Inflation Since 1959

The Swiss National Bank is likely to keep interest rate settings unchanged next week despite a recent rate cut at the European Central Bank as Swiss inflation dynamics are deemed to represent 'good' deflation.

Despite the ECB cutting its deposit rate by 10% and extend stimulus by 6-months, the SNB will most likely opt to not react and cut rates at their rate meeting next Thursday (10th).

There is “no change to our published view that the SNB will stay on hold at next week’s meeting,” says Kamal Sharma, G10 FX Strategist at Commerzbank.

The Commerzbank assumption comes even after data on Friday showed Swiss CPI at record lows of -1.4%. 

In its original note the Commerzbank team said they did not think the usual relationship between the ECB and SNB would hold this time round:

“Further monetary easing by the ECB is putting the Swiss National Bank (SNB) under pressure to act. Although the central bank has not ruled out a further interest rate cut... We expect the appreciation pressure resulting from the ECB’s expansionary measures to be limited and moderate intervention will be enough to prevent a stronger appreciation of the Swiss Franc.”

The franc weakened as much as 1.2 percent against the euro, the most in six months, after the ECB cut its deposit rate in line with forecasts, but didn’t expand its monthly asset purchases.

Many bank-watchers had been forecasting a quarter point cut to the already negative - 0.75% deposit rate, due to concerns more easing from the ECB could further devalue the EUR/CHF.

This proved to not be the case, however, after the euro actually rose following the event. Sharma notes:

“The SNB will be relieved that the ECB action did not precipitate a meaningful sell-off in EUR/CHF. With the CHF relatively stable, we do not expect a policy response next week.”

The strong arm of direct intervention is still expected to be the central banks preferred method of trying to manage its exchange rate:

“Intervention on the FX market is probably still the preferred instrument to prevent a stronger franc.”

Is Swiss Deflation 'Good' Deflation?

Switzerland has been held up by many as an example of an economy where ‘good deflation’ exists. The record low inflation in the country appears not to have had as bad an impact on the economy as many theorists would normally expect.

Unemployment is low at 3.3%, exports remain surprisingly buoyant, and a lack of wage growth has been offset by negative inflation ensuring a real-terms increase in the average Swiss’s pay packet.

The removal of the euro-franc ceiling imposed by the SNB to keep the Swiss Franc devalued and help exporters did not have as negative an impact on the economy as was forecast.

Many economists wrongly believed the economy would fall into a recession after the shock removal of the ceiling in January this year.

Whilst it led to a massive 13% appreciation in the Franc this did not strangle exports as much as had been expected. Nevertheless, recent growth has been relatively moribund with Q3 showing zero growth, although this was after an unexpectedly strong Q2 which recorded 0.2%.

Exporters may also be starting to feel the pinch as these have seen a down-turn, nevertheless resilience may be due to their generally price-insulated positioning as higher-end luxury goods.