SNB preview December 2020: Ending the year as it began

By Jeremy Hawkins, Senior European Economist
December 14, 2020

Expectations are for a relatively dull SNB policy announcement on Thursday. December’s Monetary Assessment (MPA) is seen largely mirroring the September edition with the central bank still unhappy with the levels of inflation (too weak) and the Swiss franc (too strong) but no more so than three months ago when policy was left unchanged. To this end, the policy rate is again likely to be held at its current record low of minus 0.75 percent and the central bank will also reiterate its willingness to intervene to counter any unwanted upward pressure on the local currency which, despite its limited losses, will no doubt be described as still “highly valued.”

The CHF cross-rate versus the euro has a vital input into SNB policymaking and developments on this front since the September MPA have been modestly favourable. The €/CHF1.05 level is now widely seen as the central bank’s threshold of pain and the euro has held consistently above that level with the CHF even hitting a 2020 low at the start of this month. A hard Brexit could yet prompt significant renewed capital inflows into the Swiss unit but, for now, the SNB should not be overly concerned. Indeed, using the change in sight deposits at the central bank as a proxy for intervention, the SNB has clearly been on the sidelines in recent weeks. Weekly official sales of the CHF averaged more than CHF700 million in October but have been negative every week since the period ending 20 November.

Headline CPI inflation has been stubbornly negative since February but at least November’s minus 0.7 percent annual rate was some 0.6 percentage points above the low seen in May/June. Moreover, core inflation has also accelerated from a trough of minus 0.8 percent in June to minus 0.2 percent in November. Less negative rates for the imported components in the CPI basket, in part due to the weaker CHF, have been an important factor here. Nevertheless, getting inflation close to the 2 percent mark remains a long way off.

The real economy rebounded well in the third quarter; real GDP expanding a larger than expected 7.2 percent versus the previous period to leave total output just 2 percent below its level at the end of 2019. Unemployment has also stayed low and, at 3.3 percent, the unadjusted jobless rate in November was just 1 percentage point above its level a year ago. Government support measures continue to be very important. Even so, a renewed tightening of Covid-19 restrictions at home and abroad has slowed the recovery in both domestic demand and exports. Retail sales volumes have regained their pre-pandemic level but fell in both August and September and, despite a partial bounce-back in October, discretionary spending over the last three months was down more than 1 percent versus May-July. Exports have responded similarly to a softening in key markets overseas and volumes saw a 3-month low in October. Forward-looking indicators generally remain positive but the closely watched KOF Swiss Economic Institute’s index still slid to a 4-month trough in November. Taken together, the latest indicators warn that the economy has lost some momentum and point to a near-term outlook that is somewhat less optimistic than it was a couple of months ago.

In line with most of Europe, the second wave of Covid-19 saw new cases rise sharply and much more quickly than expected. A subsequent tightening of restrictions produced a significant decline since mid-November but current levels remain uncomfortably high. As a result, and following consultations with the 26 cantons, the government has just announced the introduction of a new 3-teir containment programme that will ban most public events and impose early closing times on restaurants and shops nationwide. The new measures will remain in place until 20 January next year and will inevitably provide the economy with a new hit over the period. That said, ski resorts, a major contributor to economic activity at this time of year, will remain open.

The now familiar combination of sub-zero inflation, dangerously high coronavirus infections and a still strong local currency once again leaves the SNB with little choice this week but to retain a very accommodative monetary policy. The arrival of a Covid-19 vaccine should give business activity a major boost but, in contrast to many other countries, authorities in Switzerland are in no hurry to offer regulatory approval. The first few doses are not expected to arrive before late January and larger volumes several months after that. As such, the SNB is also likely to retain an easing bias in respect of ongoing downside risks to the local economy.