SNB Still Under Draghi’s Spell on Road to End of Stimulus

(Bloomberg) -- Mario Draghi is still a powerful force when it comes to Swiss monetary policy.

The European Central Bank president’s announcement that euro-area interest rates won’t rise for at least another year saw bets on the Swiss National Bank shift and some forecasters reconsider their relatively hawkish views on monetary-policy tightening in Switzerland.

It’s the latest domino effect from ECB measures more than three years after the advent of quantitative easing in the euro region pushed the SNB to slash interest rates to a record low and controversially drop its cap on the franc.

With central banks worldwide moving away from crisis-era measures, there had been a suggestion SNB President Thomas Jordan would take the opportunity to raise rates before the ECB. But Draghi’s latest dovishness, along with global risks that could boost the franc, mean Swiss policy makers aren’t likely to hurry to move off the negative rates they’ve used to stave off haven inflows.

“The SNB will not do anything before the ECB as long we have the uncertainties in Europe and there’s no inflation pressure in Switzerland,” said Janwillem Acket, chief economist at Julius Baer in Zurich. “Why should you change a model that’s been so successful and introduce more risk?”

Helped by an improvement in the euro-area economy, the SNB’s record-low interest rates plus intervention threats have helped to weaken the franc. The currency briefly sank as low as the symbolic 1.20 per euro earlier this year, a level many consider about fair value.

But the backdrop is changing rapidly, something policy makers have to take into account when they meet this week before their announcement on Thursday.

They’ve already received a warning shot, with the franc rallying last month on the prospect of a euro-skeptic government in Italy.

On Tuesday, the government’s expert economic group warned that a worsening of the situation in Rome could “create considerable upward pressure on the Swiss franc” with repercussions for growth. The franc appreciated 0.5 percent to 1.1516 per euro as of 11:10 a.m. Zurich time.

Central Bank Decisions in Europe This Week

DAYCOUNTRYRATEFORECASTPOLICY STATEMENT
TuesdayHungary0.9%No changeYes
ThursdaySwitzerland-0.75%No changeYes
U.K.0.5%No changeYes
Norway0.5%No changeYes

On inflation, Jordan also has no reason to rush. The SNB’s mandate is to keep price growth at less than 2 percent. SECO, the government group, raised its 2018 inflation forecast to 1 percent from its March prediction of 0.6 percent, yet sees it slowing again to 0.8 percent next year.

While both UBS and Pictet had forecast SNB tightening by late this year, the ECB’s decision on interest rates led economists to become more cautious.

The chance of a Swiss hike in 2018 has “dramatically decreased,” said Pictet economist Nadia Gharbi. “The SNB, which is a rather conservative bank, will probably be prudent and wait.”

Rate futures don’t price in any tightening by the SNB until the middle of next year. The chance of a 25 basis-point rate rise in June 2019 is about one in three, they show.

Credit Suisse is the holdout, still forecasting an SNB move first.

“Even if there’s no immediate inflationary pressure, there’s no reason why they can’t hike in the first quarter of 2019, assuming the franc does not appreciate substantially,” said economist Maxime Botteron. “The franc isn’t so overvalued and the economy is running well.”

©2018 Bloomberg L.P.

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