SNB Expects Deflation to Stay Until 2Q21. Pledged to Intervene Exchange Rate as CHF Remains Highly Valued

As widely anticipated, SNB left the policy rate unchanged at -0.75%. It reiterated the view that Swiss franc remained “highly valued” and the commitment to intervene in the FX market. The central bank will publish data on money and foreign exchange market operations on a quarterly basis, compared with annually in the past. SNB revised slightly higher economic and inflation forecasts. However, this can hardly be seen as less dovish than previously as inflation is expected to remain subdued. We expect SNB to leave the policy rate unchanged for years, with further rate cut dependent on ECB’s action.

Policymakers acknowledged that domestic economy has “picked up significantly since May”, thanks to the relaxation of restrictive measures as well as fiscal and monetary stimulus. They anticipated “a strong rise in GDP in the third quarter” and that “the positive development is likely to continue in 2021”. Yet, the SNB forecast the recovery, both at home and across the globe, will “only be partial”, subject to “unusually high uncertainty”. The central bank estimates that GDP would contract -5% this year, better than -6% projected in June. Inflation outlook is also revised higher to -0.6% this year, up from -0.7% projected in June. CPI will improve to +0.1% y/y (up from -0.2% in June’s projection) in 2021 and then to +0.2% in 2022. These forecasts are made based on the assumption that the policy rate stays at –0.75% over the entire forecast horizon.

This meeting has confirmed our view that FX intervention continues to be SNB’s main monetary policy tool. Reiterating that the Swiss franc is “still highly valued”, SNB reaffirmed its commitment to “intervene more strongly in the foreign exchange market, while taking the overall exchange rate situation into consideration”. From September 30, SNB will publish data on money and foreign exchange market operations on a quarterly basis, rather than annually. The move will increase the transparency of SNB’s intervention and could be a response to US Treasury’s accusation earlier this year that Switzerland is a currency manipulator. Little was mentioned about the future policy rate path. While further rate cut cannot be ruled out, we believe SNB will wait for the outcome of ECB’s monetary policy review before taking any action. After all, SNB’s main objective is to curb excessive strength in Swiss franc.