SNB preview September 2021: Focusing on the franc

By Jeremy Hawkins, Senior European Economist
September 20, 2021

Another largely uneventful Monetary Policy Assessment (MPA) is expected from the SNB this week. Inflation has accelerated since the June MPA but remains uncomfortably low and the central bank has been obliged to intervene in the FX markets to prevent a renewed strengthening of the Swiss franc. Any shift away from the current highly accommodative monetary stance would risk prompting fresh capital inflows into the local currency, in turn putting downward pressure on inflation. Consequently, once again there is a strong market consensus in favour of no change in the central bank’s minus 0.75 percent policy rate. With regard to the franc, in June the SNB described it as “highly valued” and current levels suggest no downgrading to this view on Thursday. Almost inevitably, the monetary authority will also reiterate its willingness to intervene as and when necessary to prevent any unwanted appreciation.

Against the euro, the CHF is currently essentially unchanged from its level at the time of the June MPA. However, in the interim, the cross-rate threatened to break below EUR/CHF1.07 for the first time since last November and the SNB was forced to intervene aggressively, selling its currency to successfully protect that level in early August. Previously, its last significant intervention had been in May/June when it seemed to have set an unofficial (and ultimately aborted) floor under the cross-rate at CHF1.09. It would appear that CHF1.07 is now the central bank’s threshold of pain. In any event, the franc clearly continues to have a dominant say in the policy stance.

In contrast to many other central banks, the SNB will not be unhappy that inflation has accelerated in recent months. However, this simply reflects the combination of a very weak starting point and, what has been so far, a notably limited rise. The yearly rate edged up from 0.6 percent at the time of the June MPA to 0.9 percent in August. However, that was just in line with the official forecast and, during the same period, the core rate only rose from 0.2 percent to 0.4 percent. Moreover, the June projection put the headline rate still below 1 percent at the end of the forecast horizon. The bottom line is that the central bank has accepted that the chances of getting inflation back near the 2 percent mark any time soon are very limited. That said, since the SNB’s primary goal is still securing and sustaining price stability (defined as an annual increase in consumer prices of less than 2 percent) the June forecast effectively implied that even then the already ultra-loose policy stance was still too tight.

The real economy had a good second quarter, GDP expanding 1.8 percent versus the January-March period as household spending rebounded 4.1 percent on the back of looser Covid restrictions. There was also a solid 1.9 percent rebound in investment in equipment and software as well as a positive impact from net foreign trade. However, more up-to-date indicators warn that growth has started to cool. Both the SVME PMI and the KOF’s leading indicator fell sharply in August, the latter especially steeply and for a third consecutive month. Moreover, following four straight monthly declines, retail sales volumes in July were only 1.7 percent above their February 2020 pre-pandemic mark having been up some 15.2 percent as recently as March. The labour market continues to hold up well – the jobless rate is now only 0.6 percentage points above its level in February last year – but even here vacancies declined in both July and August having previously risen steeply in every month in 2021. In the same vein, surveys of investor sentiment have similarly deteriorated, albeit from historically high levels, and the August ZEW gauge posted its weakest reading since March 2020.

In fact, and in contrast to much of the year, the economic data released since the June MPA have generally undershot market expectations. Indicators reported in July and August were often well short of the consensus and in mid-August Econoday’s economic consensus divergence index posted its weakest reading since November 2019. The economy was most likely still expanding but failed to keep up with what the forecasters were predicting.

In line with much of Europe, Switzerland was hit by another wave of Covid in August and at a daily rate of around 2,100, infections remain high. However, hospitalisations now seem to be trending down and the death rate is much lower than in previous waves. Current restrictions are relatively limited (although they vary between cantons) but the government is worried about the looming winter period. Consequently, in an effort to reduce the risk of having to impose new lockdowns the government has just widened the use of Covid certificates. The extension will last until the end of January 2022.

In sum, Thursday’s announcement is unlikely to have any major impact on investor sentiment. The ongoing combination of too weak inflation and too strong local currency leaves the SNB with little room for manoeuvre. Indeed, should QE tapering abroad fall behind the market’s expected timetable, the central bank could well find itself having to intervene again to stop a strengthening franc from adding to its price stability problems.