SNB preview June 2021: Steady-as-she-goes

By Jeremy Hawkins, Senior European Economist
June 15, 2021

Little is expected from this quarter’s SNB Monetary Policy Assessment (MPA). Inflation is up since the March MPA, but still much closer to 0 percent than 2 percent and despite appreciating in recent weeks, the Swiss franc remains well below its highs of May last year. That said, the currency might have been a good deal stronger but for significant SNB sales. Consequently, there is a strong market consensus in favour of no change in the central bank’s stance, meaning that the benchmark policy rate should stay pegged at its record low of minus 0.75 percent. With regard to the franc, in March the SNB abandoned its previous description of being “highly valued” but reiterated its willingness to intervene as and when necessary to prevent any unwanted appreciation. A similar outturn seems likely on Thursday.

At currently EUR/CHF1.089, the local currency is around 2 percent stronger than at the time of the March MPA. The Swiss unit began to strengthen quite aggressively in late April and the SNB felt obliged to intervene aggressively in the first half of May, probably aiming to prevent the cross-rate from breaking significantly below CHF1.09. This level may now be seen as the central bank’s new pain threshold. In fact, over the first three weeks of the month SNB sight deposits (a proxy for intervention) rose by an average CHF2.75 billion a week, signalling the heaviest period of official sales since June/July last year when the CHF1.05 level was under attack. The bottom line is that while the SNB may have thrown in the towel on the former EUR/CHF1.20 target floor, it is still very sensitive to any sharp appreciation by the franc.

Inflation developments since the last meeting have been moderately positive. Headline annual CPI inflation has climbed quite steadily, albeit only slowly, from a low of minus 1.3 percent in May/June 2020 to 0.6 percent last month. However, at now 0.2 percent, over the same period the core rate has increased only about half that amount. Notwithstanding a clear pick-up in pipeline pressures – total supply inflation has jumped fully 8 percentage points since May 2020 – underlying inflation at the consumer level is still nowhere near where the SNB would like to see it. Even the domestic component of the headline CPI is only running at a lowly 0.2 percent yearly rate.

In any event, the SNB has essentially accepted that inflation will remain weak over the foreseeable future – its March forecast put the annual CPI rate at just 0.5 percent in 2023. Rather, and in line with most other central banks, it is more focussed on supporting the real economy. To this end, Swiss GDP contracted at a 0.5 percent quarterly rate at the start of the year. This was just a couple of ticks steeper than seen in the Eurozone and will have come as no surprise to the central bank which had already warned of a probable downturn. More significantly, since then the economic data have improved substantially. The labour market has been surprisingly firm for some time now and, while highly volatile as Covid restrictions are eased, retail sales volumes are now nearly 9 percent above their pre-pandemic mark in February last year. At least as importantly, the forward-looking indicators have turned sharply higher. Indeed, both the PMI and the KOF’s leading index saw fresh record highs in May which, taken at face value, points to a very sharp rebound in growth over coming months.

Indeed, since the start of April, the major economic indicators have consistently outperformed market expectations – Econoday’s economic consensus divergence index in early May even climbed to its highest level so far this year. This suggests that the evolving recovery could well be stronger than currently discounted.

Such a scenario would probably need the economy reopening according to government plans. Crucially, over recent weeks the number of new Covid infections and related deaths have dropped significantly and at the end of last month the health ministry indicated that a full reopening of the economy could be possible in August if the vaccination programme progresses as hoped. Following a belated start, the rollout has accelerated sharply since the start of the second quarter and at 67, the number of doses administered per 100 people is much the same as in the EU. This has helped to reduce the reproduction rate (R) to 0.67, its lowest reading since May last year. Consequently, on 31 May Switzerland entered the penultimate stage of its return to normality with restaurants being allowed to seat customers inside and gatherings of up to 30 people permitted. Earlier this month the Federal Council also adopted an ordinance on Covid-19 certificates, aimed mainly at foreign travellers. The first certificates were issued on 7 June 2021 and should be available to the general public by the end of June.

In sum, another steady-as-she-goes policy announcement is very likely on Thursday. Negative interest rates are here to stay until inflation climbs significantly higher and even then, the central bank will be more than a little wary about the impact of any monetary tightening on the Swiss franc. As it is, the recent gains by the currency could well prompt a slightly more aggressive tone in any commentary on the FX markets.