GAM comments on SNB’s last arrow
Joachim Corbach, head of currencies and commodities at GAM in Zurich comments on growing pressure on the Swiss National Bank (SNB) to further ease monetary conditions.
The SNB is now backed into a corner and might have just one more arrow left in its monetary policy quiver. After the restrained move from the ECB, and ahead of the expected rate hike from the Fed next week, the SNB is likely to guard that arrow for later. The ECB decision, which disappointed many market participants, has helped alleviate some of the upward pressure on the Swiss franc and by consequence, on the SNB to further ease monetary conditions.
In theory, the SNB has three options to counter the franc’s strength: further lower the deposit rate, reduce the exemption threshold below which the negative rate is not levied or intervene directly in the foreign exchange markets. In reality, the SNB doesn’t have much room to manoeuvre on any of the options.
It is highly contested in academic circles and untested empirically at what point investors would switch from holding money in the bank to hoarding cash. But the current negative interest rate is probably pretty close to that line in the sand and the SNB would not want to inch nearer to it. The average Swiss saver has so far been spared from negative rates, thanks to the current exemption threshold for banks, which means that negative interest is levied on only about 30% of their sight deposits. And the fact that mortgage interest rates have so far escaped the downward pressure. But this is a very fragile balance and a reduction of the exemption threshold could easily destabilise it.
The SNB is quite limited in its ability to intervene in the markets directly to weaken the franc because that would lead to a further expansion of its already bloated balance sheet. Despite this, the SNB seems to have been active in the markets lately. The weekly sight deposit data doesn’t indicate interventions in the spot market. But the unusually high increase in the implied interest rate differential between the euro and the franc in the forward market means the SNB has probably been buying euros versus the franc through forward contracts on a grand scale.
The disappointing GDP and PMI numbers last week confirmed that the appreciation of the franc has not gone unnoticed in the real economy. Negative inflation in Switzerland means that, despite the record low nominal rates, the real interest rates here are among the highest in Europe, which has anything but a stimulating effect on growth. So, the SNB cannot afford to lose sight of the goal to bring the franc lower or at least to stop its appreciation.
The trade-weighted exchange rate of the franc has been falling over the past months thanks mostly to the strong dollar. It is likely that the expected rate hike from the Fed next week would lead to a further depreciation of the franc against the dollar. So the SNB will await the Fed’s decision with a bated breath and hope that this time market expectations are not disappointed.