SNB preview September 2020: Coronavirus and the currency

September 22, 2020

SNB policy continues to be closely linked to the performance of the Swiss franc and Thursday’s policy announcement can be expected to reaffirm just that. Since the last Monetary Policy Assessment (MPA) in June the Swiss central bank has seen its currency trade within a relatively tight band versus the euro but at levels much weaker than those seen in May when the unit’s strength prompted significant speculation about another cut in key interest rates. As a result, pressure from this quarter for additional monetary accommodation has been relatively limited and short-term money market rates have moved broadly sideways. To this end, the policy rate is widely expected to be left at minus 0.75 percent again this week. However, this is not to say that the SNB is at all comfortable with current levels of the franc and the new policy statement will no doubt reiterate June’s view that the unit is still “highly valued.”

In fact, despite the generally weaker tone to the franc the SNB has continued to intervene in the currency markets to guard against any renewed appreciation. Using the change in sight deposits at the central bank as a proxy for intervention, weekly central bank sales of the CHF have averaged just more than CHF1.3 billion since mid-August. This is well short of the CHF13 billion plus peaks recorded in May but still shows that the SNB has hardly been sitting on its hands.

The cross-rate versus the euro is normally regarded as the key litmus test for the SNB and the €/CHF1.05 level is now widely seen as its threshold of pain. However, the franc has also appreciated sharply against the U.S. dollar (around 7 percent since early April) and gains here have also added to downward pressure on inflation by lowering import prices. Hence, within the overall CPI basket, the domestic price element was running at a zero annual percent rate in August while its import price counterpart was down at minus 3.4 percent. With total supply price inflation in negative territory every month since December 2018, prospects for a meaningful acceleration in consumer prices any time soon look very slim.

The easing in Covid-19 lockdown restrictions that began in late April has been accompanied by a surprisingly sharp rebound in consumer demand and retail sales had already fully reversed their virus-inspired slump by May. The hit to the labour market has also been smaller than generally expected and at just 3.4 percent, the seasonally adjusted jobless rate in August was only 1.1 percentage points higher on the year. Government support schemes have been a factor here but a marked fall in the number of workers on reduced hours and a rising trend in vacancies points to an underlying improvement too. There has also been good news on the foreign trade front with merchandise exports in August climbing to within a whisker of their February print. As a result, earlier this month the State Secretariat for Economic Affairs (SECO) revised its forecast contraction in Swiss GDP in 2020 from June’s 6.2 percent to 5.0 percent. The less downbeat projection is in line with the closely-watched KOF leading economic indicator which last month registered its strongest reading in more than a decade.

However, SECO’s revised outlook crucially assumes that a further major spread of the coronavirus and subsequent containment measures do not materialise in Switzerland or in key trading partner countries. As it is, domestic new Covid-19 cases are on the rise (as they are in most of Europe) and with the reproduction number (R) moving back above one, in mid-September were at their highest level in five months. The Swiss authorities were quick to respond to the initial virus wave through a mix of tracking, testing and early containment measures, a policy that proved very effective. However, any move to introduce significant new restrictions would inevitably have negative consequences for the economic recovery.

The combination of sub-zero inflation, climbing coronavirus infections and a still overly strong local currency leaves the SNB with little choice this week but to retain a very accommodative monetary policy. It also points to an easing bias which, notwithstanding a clear reluctance to cut official interest rates again, means that money market rates could yet go further below zero over coming months.