FLASH BRIEF
SNB preview December 2021: Struggling against the speculators

By Jeremy Hawkins, Senior European Economist
December 13, 2021

Thursday’s SNB Monetary Policy Assessment (MPA) is widely expected to produce another vote for no change. Since the September meeting, inflation has crept back above the 1 percent mark but remains low and well short of the near-2 percent mark favoured by the Swiss central bank. At the same time, the franc has reaffirmed its status as Europe’s preferred safe haven currency via heavy capital inflows that have propelled the unit through a number of the SNB’s supposed pain thresholds. Consequently, with the monetary authority reluctant to push local interest rates even deeper into negative territory (the key deposit rate is still minus 0.75 percent), it will probably have to sell a very hard line on the franc to prevent a move further towards parity against the euro. In September, the MPA again described the unit “highly valued” and current levels suggest a stronger statement alongside the inevitable reiteration of the SNB’s willingness to intervene as and when necessary to prevent further appreciation.

In fact, the SNB has been particularly busy in the FX markets since the middle of October. Then, the appreciating franc threatened to break beneath EUR/CHF1.07, the level the central bank successfully defended in August. However, this time round the SNB’s efforts were in vain and in early November the cross-rate even fell below the CHF1.05 level previously protected through very heavy intervention in March/April last year. Late last month SNB board member Andrea Maechler stressed that the central bank is committed to currency market interventions to check the rise of its currency but the cross-rate is still testing EUR/CHF1.04.

The need to do just that is highlighted in the inflation data. In line with the rest of Europe, Swiss inflation has accelerated over much of the year to date. However, unlike most of Europe, the rise has been only quite modest, in no small way due to the relative buoyancy of the local currency. So, while October import prices rose 9.4 percent on the year in Switzerland, their German counterpart surged some 21.7 percent. Indeed, Swiss headline inflation last month was still only 1.5 percent and at just 0.7 percent, the core rate has yet to break back above the 1 percent mark. Comparable provisional rates for the Eurozone were some 4.9 percent and 2.6 percent respectively.

The September MPA essentially indicated that even a minus 0.75 percent deposit rate was too high as the projection conditioned on that rate being held steady showed inflation at just 0.8 percent in 2024. Recent events suggest that this profile may be adjusted a little higher on Thursday but the chances are that the end-of-forecast prediction will still fall well short of 2 percent.

Meantime, in terms of total output, the real economy has fully recovered from Covid. GDP reclaimed its pre-crisis level in the second quarter and was about 1.5 percent above it in the period just ended. Quarterly growth of 1.7 percent in July-September was dominated by household consumption which contributed fully 1.2 percentage points as Covid restrictions were eased further. There was also another strong performance by goods exports which, excluding valuables and transit trade, were up 3.4 percent. This was their fifth successive increase and made for a 10.1 percent rise versus their pre-crisis level. On the same basis, imports were up only 0.2 percent, providing additional ammunition for those who claim that the franc is not overvalued.

However, it was not all good news as gross fixed capital formation fell 0.9 percent, its third decline in the last four quarters. In addition, registered unemployment, despite decreasing almost every month since June 2020, is still nearly 18 percent above its level in February 2020 and discretionary retail sales have still only risen once since March. Moreover, leading indicators such as the SVME PMI and, in particular, the KOF’s economic barometer have also weakened significantly in recent months as has the ZEW investor sentiment index.

Even so, in general economic activity since the September MPA has evolved broadly in line with market expectations. Econoday’s economic consensus divergence index (ECDI) has oscillated within a relatively narrow range of minus 14 and 10; close enough to zero to indicate that market expectations were never far off the mark. Indeed, at precisely zero, the latest reading indicates that forecasters have been bang on in calling recent developments.

Following the pattern seen across much of Europe, new Covid cases have climbed exponentially since mid-October and current levels are now well above the record peak seen in November 2020. Late last month, voters backed legislation to extend the use of masks and Covid certificates that allow only those who have been vaccinated, recovered or tested negative to attend public events and gatherings. The fifth wave started before the discovery of the Omicron variant, the first two cases of which were detected at the end of last month, and already ICU beds in Zurich, the country’s largest canton, are fully occupied.

In sum, Thursday’s announcement will probably be aimed at the speculators who are pushing the Swiss franc to levels against the euro not seen since the SNB abandoned its EUR/CHF1.20 target floor back in January 2015. However, even if the current wave of intervention has slowed the unit’s ascent, it has clearly not halted, let alone reversed it. Consequently, unless the central bank is prepared to cut interest rates still further, it may just have to ride the storm, hope at some point to catch the market very long francs and then intervene really aggressively as it did in April and May last year.