SNB to Stand Firm After Intervention Frenzy to Tame Franc

(Bloomberg) -- Swiss National Bank President Thomas Jordan has taken his foot off the pedal after the most aggressive currency intervention in five years early in the outbreak of the coronavirus pandemic.

The franc’s 1% decline since the SNB’s last policy meeting in June means policy makers are likely to keep interest rates unchanged at a record low on Thursday. To keep up the pressure, they’ll repeat their threat to combat any unwanted strengthening of the haven currency.

Credit Suisse Group AG calculates Jordan and his colleagues spent more than 90 billion francs ($98 billion) on interventions in the first half of 2020 as the currency rose to a five-year high. But they won something of a reprieve over the summer thanks to the European Union’s historic spending package and a rise in the euro. The recession is also proving less deep than initially feared.

“Switzerland is getting out of this crisis rather well,” said Nadia Gharbi, an economist at Pictet & Cie in Geneva. “But I think they will be quite prudent.”

Jordan has admitted the SNB intervened “more strongly” this year, and he has reason to keep the threat of action alive this week.

Britain’s divorce from the EU single market, the Federal Reserve’s loose monetary policy stance, and the U.S. presidential election in November, all have the potential to stir up trouble for the SNB, whose monetary policy hinges on limiting fallout from an overvalued currency. Also hanging over Switzerland is a U.S. Treasury review that could see the country labeled a currency manipulator.

Along with salvos of interventions, a deposit rate of -0.75% is the SNB’s main tool for fending off the threat of deflation caused by the rallying currency. Goldman Sachs Group Inc. and UBS Group AG are among those predicting no change to the rate on Thursday.

The SNB “probably will have taken heart from the fact that despite the pick-up in cross-market volatility, there has not been a noticeable pickup in intervention needs,” Geoff Yu, market strategist at Bank of New York Mellon, said in a report. The performance of the euro-franc exchange rate “has also not indicated any stress, measured in spot and options markets.”

In June, the SNB predicted Switzerland’s inflation rate will be negative this year and next, with only modest price growth in 2022. The central bank’s price-stability definition is positive rates of inflation below 2% over the medium term.

With inflation very weak, “the SNB will have to live with a reality that is not satisfactory,” said GianLuigi Mandruzzato, a strategist at EFG Bank in Switzerland. “At best they can try to limit the damage.”

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