SNB preview March 2021: Falling franc means a stable policy

By Jeremy Hawkins, Senior European Economist
March 23, 2021

Expectations are for another relatively subdued SNB policy announcement on Thursday. Inflation is still nowhere close to target but at least the Swiss franc has lost significant ground against both the euro and the U.S. dollar so far this year. As such, in substance this quarter’s Monetary Policy Assessment (MPA) is likely to be little different from the December edition and the benchmark policy rate will continue to be pegged at its record low of minus 0.75 percent. In addition, despite the franc’s recent slippage, the central bank will still probably describe the unit as “highly valued” and reiterate its willingness to intervene to counter any unwanted renewed upward pressure.

The CHF has declined around 2 percent against the euro since the last MPA and about 5 percent against the dollar. At €/CHF1.105 at the time of writing, the key cross-rate puts the Swiss unit at its weakest level in almost two years, albeit still a long way off its former CHF1.20 target floor. These losses have occurred without any help from the SNB which appears to have been largely on the sidelines since January. In fact, the weekly change in SNB sight deposits (a proxy for intervention) has fallen in five of the last seven weeks and the level is now hardly changed from the start of the year.

The weaker franc has helped to lift inflation slightly but, at minus 0.5 percent, February’s annual headline rate was still below zero – as it has been every month for the last year. At the same time, having moved briefly out of negative territory in January, the underlying rate also reversed tack and dropped to just minus 0.3 percent. However, the SNB has essentially accepted that inflation will remain weak over the foreseeable future and instead, like many other central banks, is more focussed on supporting the real economy.

To this end, the labour market is still weakening but only slowly and at a significantly reduced pace compared with just after the first virus wave hit. Since the start of the pandemic, the government has introduced a number of employment-related measures, ranging from the deferral of social insurance contributions through an extension of short-time working to compensation for the self-employed and, by and large, these initiatives have worked well. In fact, at 3.6 percent, the jobless rate in February was less than 1 percentage point above its level a year earlier. Moreover, recent months have also seen an accelerated rise in vacancies which bodes well for employment growth to come.

Even so, January was a bad month for the household sector. Consumer sentiment fell further below its long-run average and retail sales had their worst period since last April. In particular, Covid-19 continues to hit the hotel and restaurant sector hard and a recent survey found more than 18 percent of businesses polled having closed with no plans to reopen. A further 23 percent are expected to shut permanently in the absence of additional financial aid.

The downturn in consumer confidence may be related to the slow rollout of the vaccination programme at a time when new virus cases are rising again. The reproduction rate has climbed to 1.14 with 21 of the 26 cantons now above one. More than two months since the first doses were administered, the Swiss vaccination rate per 100 is 14, only just above the heavily criticised EU rate (13) and well short of the rates in the UK (43) and the U.S. (36). The main issue appears to be one of supply – of the 1.6 million doses ordered by the government for March, only 1.2 million have been delivered. As a result, the Federal Council said last Friday that Switzerland should not proceed with the second phase of reopening planned for this week. It also indicated that that it would now cover all costs of rapid tests.

Compared with the December MPA, higher inflation and a lower Swiss franc should sit well with the SNB. However, the bottom line is that inflation is still too weak and the franc still too strong so policy has little choice but to remain very accommodative. Negative interest rates are not going away any time soon and without a step-up in the vaccination programme, a return to positive borrowing costs will be even further down the road. As such, the SNB is also likely to retain an easing bias in respect of ongoing downside risks to the local economy.