Swiss National Bank surprinsingly silent regarding the strength of the Swiss franc

  • As expected, the SNB kept its target rate on hold and was more upbeat on the prospects for growth
  • We still do not expect any rate hike before Q4 2011 at the earliest
  • The SNB was surprisingly silent about problems posed by the surging Swiss franc
  • Although anything looks possible in the short-run, we continue to expect the franc to weaken over the next 6-12 months point of view

As was widely expected, at its quarterly monetary policy meeting the SNB kept its target three-month LIBOR rate on hold at 0.25%. The official rate has been at this level since March 2009 (see chart below).

More upbeat on future economic growth
As expected following the publication of quite strong Q4 GDP numbers two weeks ago, the SNB was more upbeat regarding economic growth, saying that “the economic recovery in Switzerland recently proved to be more dynamic than anticipated” and that “positive business expectations suggest favourable developments in the economy in the coming months”. However, it repeated that “during the course of 2011, the SNB continues to anticipate weakening growth”, adding that “continuing debt problems in Europe and the possible dampening effects of high oil prices on economic activity pose considerable downside risks” and that “uncertainty about developments in Japan has introduced a new element of risk”. The SNB revised up its forecast for GDP growth in 2011 from 1.5% to 2.0%. As a result, their forecast is now slightly above our own (1.7%).

Regarding its conditional inflation forecasts, the SNB has made only oil related short-term revisions: from 0.4% to 0.8% for 2011 and from 1.0% to1.1% for 2012. On the hypothesis of unchanged rates, headline inflation is not expected to climb above the 2% mark until Q3 2013, the same timeframe as in its previous statement (see chart above).

In its statement, the SNB had very little to say about the Swiss franc
Once again, the SNB had very little to say regarding the Swiss franc and its recent surge. The SNB mentioned the marked appreciation of the Swiss franc a few times in its statement and continues to cite the strength of the franc as the main factor behind its expectation that growth will weaken in 2011 but the now “usual” comments on the SNB’s readiness to react if the Swiss franc’s appreciation was to have a detrimental effect on the Swiss economy and if it was lead to the emergence of a threat of deflation were absent in today’s statement. In our view, this omission is quite surprising.

By our own calculations of monetary conditions (see chart below), the tightening recorded over the past 12 months has been huge, as it is roughly equivalent to a rise of more than 350bp in short-term rates. Given what the Swiss franc’s appreciation means in term of monetary conditions and the SNB’s expectations of a slowdown in growth over the coming quarters, we do not expect the bank to start hiking its target interest rate before Q4 2011, at the earliest, and based on the assumption that the Swiss franc falls back.

The Swiss franc will probably be weaker in 6-12 months time
Today, the Swiss franc reached a fresh record high against the dollar and once again approached its all-time high against the euro. The outlook appears to be as uncertain as ever and with risk aversion sharply on the rise (backing the light of the Japanese disaster and tensions in North Africa and the Middle East) and the SNB remaining surprisingly silent, the franc may well move even higher in the short-run. However, (1) the current “panic buying” of Swiss francs is likely to abate at some stage or the other, (2) we believe the intensity of the sovereign debt crisis in the euro area will diminish further over the coming few months, (3) the Swiss economy is likely to slow over the coming few quarters, (4) the ECB will most probably hike its intervention rate before the SNB and (4) the Swiss franc is fundamentally highly overvalued. As a result, we continue to expect a lower Swiss franc against both the euro and the dollar on a 6-to-12-month horizon.

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