UBS Sees Outside Chance of Swiss Interest Rate Cut to Tame Franc

(Bloomberg) -- Foreign exchange interventions are likely to remain the Swiss National Bank’s go-to measure for taming the franc, though a cut to interest rates cannot be ruled out, according to UBS Group AG.

“In our baseline, we do not envisage the SNB cutting rates further, but admit it is a close call,” economists led by Felix Huefner wrote in a note to clients. “At the same time, the probability of a rate cut is not zero. The SNB has prepared the ground for such a move by extending the exemption thresholds at its March meeting.”

SNB President Thomas Jordan said earlier this month that the central bank has raised the intensity of its interventions, citin the “enormous” pressure the franc experienced due to the coronavirus outbreak.

Sight deposits -- the amount of cash commercial banks have parked with the central bank -- have risen strongly in the past two months. While one factor behind the increase is likely to have been interventions, the SNB’s Covid-19 loan refinancing facility also plays a part.

“While the ECB is not cutting rates, it may extend its substantial policy easing through its asset purchases, and this may add to franc strength,” the economists said in the note. “The longer interventions last and the stronger the franc gets, the more likely a rate cut becomes.”

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