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SNB to Keep Its Powder Dry and Brace for Brexit: Decision Guide

SNB to Keep Its Powder Dry and Brace for Brexit: Decision Guide

(Bloomberg) --

Swiss National Bank chief Thomas Jordan is out of the hot seat for now -- perhaps until Brexit hits.

Pressure on the SNB to cut interest rates has eased recently as the franc slipped from a two-year peak despite a new barrage of European Central Bank stimulus. Economists forecast that the main policy rate will stay at -0.75% on Thursday as officials preserve room for maneuver down the road.

On Tuesday, the Swiss government cited the threat from a disorganized Brexit at the end of October, saying it would significantly curb European momentum and put upward pressure on the franc, hurting Swiss exports.

SNB to Keep Its Powder Dry and Brace for Brexit: Decision Guide

To prevent capital inflows, the SNB has long argued it needs an interest rate differential with the euro area, which suggests it should mimic Denmark and deliver a 10 basis-point cut. Yet that would be risky given its rate is already so low, and could backfire if banks start to pass the charge on to retail clients, prompting hoarding.

Banks are already complaining about negative rates, and economists have raised questions about their efficacy as a currency tool.

There’s no press conference scheduled, but here’s what to look for when the policy statement hits at 9:30 a.m. in Zurich:

Franc Language

While the franc strengthened in August, statistics indicate foreigners aren’t piling into the safety of Switzerland to the extent seen during the sovereign debt crisis -- which forced the SNB to spend a record 188 billion francs ($190 billion) in 2012 -- or in 2015.

SNB to Keep Its Powder Dry and Brace for Brexit: Decision Guide

In its policy statement, the SNB is almost certain to repeat its “highly valued” description of the currency and affirm its willingness to intervene if needed.

While in nominal terms the franc is more than 30% stronger against the common currency than in late 2007, much slower inflation in Switzerland than the euro area means the relative difference is reduced. In fact, according Credit Suisse, it’s only slightly overvalued.

Downgrade Risk

The SNB downgraded its inflation outlook earlier this year and the franc’s recent rally could prompt another cut. Economists surveyed by Bloomberg don’t see the inflation rate even hitting 1% in 2020 or 2021.

SNB to Keep Its Powder Dry and Brace for Brexit: Decision Guide

The central bank sees economic growth of about 1.5% this year, but there’s downside risks. Most notably, Germany, Switzerland’s biggest export market, has slipped close to recession.

The government cut its 2019 growth forecast to 0.8% from 1.2%, though some of that was due to the effect of major sport events, an anomaly in the country’s output calculation.

SNB to Keep Its Powder Dry and Brace for Brexit: Decision Guide

Property Market

As in other countries, Switzerland’s loose monetary policy has fueled a housing market boom, and the central bank has warned of a correction, something that could be repeated on Thursday.

The SNB can’t raise interest rates for fear of turning up the heat on the franc, so any action would require macro-prudential tools such as the counter-cyclical capital buffer. Lenders already stiffened the rules for residential investment properties.

--With assistance from Harumi Ichikura and Jan Dahinten.

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

To contact the editor responsible for this story: Fergal O'Brien at fobrien@bloomberg.net

©2019 Bloomberg L.P.