Article13 December 2018Reading time 5 minutes

The Swiss National Bank goes Japanese

Switzerland's National Bank kept its monetary policy unchanged at its December meeting. Its inflation forecasts show the central bank is even more dovish than before and that they'll probably not hike until March 2020, with the risk that it will be postponed even longer

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Unchanged policy

As expected, the Swiss National Bank maintained its ultra-accommodative monetary policy unchanged. 

The interest rate on sight deposits remains fixed at -0.75%, and the three-month Libor target range at -1.25% to -0.25%, as is the case since January 2015. It also indicates that it will continue to intervene as needed in the foreign exchange market. It still considers that the Swiss franc is "highly valued" even though the currency has depreciated slightly in value weighted by foreign trade. This is due to the strengthening of the dollar, while the franc hasn't changed much, remaining at a high level against the euro.

The SNB also presented its new growth forecasts and its assessment of the economic situation. Although it now expects GDP growth to be slightly lower than before, it remains relatively optimistic about growth prospects. 

The Swiss national bank forecasts growth of 2.5% in 2018 and 1.5% in 2019 and also explained the risks are tilted downwards

The central bank believes that the decline in GDP in Q3 is mainly due to temporary factors such as the interruption of the production of power plants due to climatic conditions, no sporting event etc. and that the momentum has certainly slightly eased but remains favourable, especially thanks to the job market which is doing very well. It forecasts growth of 2.5% in 2018 and 1.5% in 2019 and also explained the risks are tilted downwards. 

Among the risks that could impact Switzerland, it cites a slowdown in global growth, but also the economic and political uncertainties that expose exchange rates to "risks of strong and abrupt fluctuations". This type of fluctuation would strongly change monetary conditions and directly impact the Swiss economy. The SNB, therefore, remains extremely cautious in its monetary policy.

Lower inflation forecast

The mandate of the central bank is to ensure price stability. Unlike other large central banks, the SNB doesn't want price growth to be close to 2% but seeks to achieve inflation below 2% (albeit positive). 

Given Switzerland's deflationary history (inflation was negative between 2012 and 2016 for example), inflation expectations are heavily monitored. According to surveys of economic actors, long-term inflation expectations are currently just above 1%. But any change in monetary policy can drive inflation and therefore make inflation expectations to fall. Inflation is still low for the moment (0.9% YoY, with underlying inflation at 0.2%).

With the revision of inflation forecasts, the central bank seems even more dovish than before. The normalisation of monetary policy may not happen for a few years and looks ever more likely that it is going Japanese and it won't hike rates for a while. We don't expect any rate hike before March 2020 and it could be postponed even further

The SNB has lowered its forecast of conditional inflation (i.e. without any change in monetary policy) for 2019 and 2020. While it still estimates that inflation would be 0.9% in 2019, it believes that inflation would now be 0.5% in 2019. This is much lower than its previous estimate of September (0.8%). At its December 2017 meeting, the SNB was still forecasting inflation of 1.1% in 2019. For 2020, it now forecasts inflation at 1%.

With the revision of the inflation forecasts, the SNB seems even more dovish than before. The normalisation of monetary policy isn't happening just yet and may not happen for a few more years. It looks increasingly likely that the central bank is going Japanese and will take a very long time before its first rate hike. We don't expect any rate hike before March 2020 and it could be postponed further. To be sure, we believe the SNB will wait for the ECB to start hiking interest rate before doing so. 

A temporary stock exchange equivalence

Among the risks weighing on the Swiss outlook, the stock exchange equivalence was a major concern, but it seems the problem has been settled for now. 

The European Commission has discussed the possibility of extending the equivalence by six months, until the end of June 2019. It is being announced this week as 'under discussion' but media reports indicate the political decision has already been taken and that it could be formalised this week. However, the decision still needs to be validated by the EU Member states. 

If granted, this temporary equivalence would, at least for the time being prevent big problems on the Swiss stock exchange because equivalence is necessary for European traders to be authorised to exchange securities directly. Without equivalence, a sharp decline in trading volume on the Swiss stock market would be expected. 

This decision to temporarily extend follows the decision of the Swiss Federal Council not to ratify the framework agreement that would shape the future relationship between Switzerland and the EU, but to launch a large consultation with the unions, the cantons and the political parties on the subject. This consultation is expected to last until spring. After this consultation and at the end of the six months, the question of equivalency will probably come back.