SNB Stays Shackled to Euro Zone After Glimpse of Freedom

(Bloomberg) -- Thomas Jordan might look back on 2018 as a rare moment when the Swiss National Bank could have unshackled itself from its bigger neighbor.

When the franc returned to the 1.20 per euro level in April -- matching the bank’s old ceiling -- the SNB president gained some room to raise interest rates without waiting for the European Central Bank to move first. Yet that moment has passed, with the currency back at 1.13 and little prospect of significant weakening for now.

That means the Swiss will probably stick with the G10’s lowest interest rate on Thursday. The decision comes hours before the ECB is expected to end its quantitative easing program, whose introduction in 2015 led Jordan to scrap a cap on the franc and slash interest rates. With euro-area growth slowing, prospects for an ECB rate increase next year are dimming, which will also force the SNB to keep its stance extremely loose.

“I don’t think they want to risk pressing ahead on rates -- volatility is high, and there’s Brexit and trade tensions,” said Maxime Botteron, an economist at Credit Suisse in Zurich. “The situation would clearly be different if the franc were weaker, but at its current level it’s just too strong.”

Policy makers have long cited the currency and “fragile” markets as justification for negative interest rates and intervention threats. The franc, which has climbed more than 6 percent since April, was at 1.12360 per euro as of 9:52 a.m. in Zurich on Tuesday.

While they saw the economy open 2018 on a strong footing, the situation has since reversed. Global trade growth slowed, Italy’s budget risk emerged and Switzerland’s economy shrank in the third quarter, tracking a slump seen in neighboring Germany.

That said, the central bank has a history of surprises, notably the 2015 decision to stop capping the franc. Former SNB chief economist Kurt Schiltknecht argued a month ago that it should move off rock-bottom rates. UBS’s Daniel Kalt has also voiced skepticism about their enduring usefulness.

Jordan will get to explain his thinking at a press conference after Thursday’s decision, which will be accompanied by new economic forecasts. All economists surveyed by Bloomberg see no change to monetary policy at the meeting, with the deposit rate staying at minus 0.75 percent.

While recent surveys suggest the third-quarter slump isn’t set to endure, it does mean that growth this year will clock in at the lower end of the SNB’s projections. As for inflation, the central bank sees it slowing next year, according to its most recent forecasts.

“All that’s happening will support them in their argument that they need to be prudent,” said Nadia Gharbi, an economist at Pictet in Geneva. “We don’t see inflation accelerating much next year, so policy should stay accommodative most of, if not all of, the year.”

--With assistance from Harumi Ichikura.

To contact the reporter on this story: Catherine Bosley in Zurich at cbosley1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Paul Gordon

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