SNB to turn More Hawkish in Monetary Policy

Despite recent positive economic data, the SNB will continue to leave the target range for 3-month LIBOR at 0-0.75, targeting to keep the rate at 0.25%, in March. The Monetary Policy Announcement will likely turn more hawkish with upgrades in both growth and inflation outlooks.

Developments unfolded since the December signaled Swiss economic recovery has been on track. 4Q09 GDP grew +0.7% while 3Q09 GDP was revised up to +0.5%. Unemployment rate also edged lower to 4.1% in February, the first drop since 2008, while retail sales surged +4.4% y/y in January

CPI inflation rose +0.1% m/m and +0.9% y/y in February. It's highly likely that inflation in the first quarter will exceed SNB's forecast of +0.79% y/y. Even though the overshoot would not be excessive in the near-term, we believe it would raise the central bank's worry about medium-term inflationary risks. As stated in previous monetary statements, 'the inflation forecast shows that the expansionary monetary policy cannot be maintained indefinitely without compromising medium and long-term price stability'.

Although the SNB reiterated it will 'act decisively to prevent any excessive appreciation of the Swiss franc against the euro', it's apparent that the central bank has done little to intervene appreciation of Swiss franc in recent month. EURCHF has lost -2.5% after breaking below 1.5 in December. Weakness in the euro as a result sovereign concerns in Greece and peripheral European countries should make the SNB reluctant to take away the pledge to intervene.

Before announcement of the first rate hike, the SNB should implement some measures to drain excess liquidity. Switzerland's monetary base soared to the peak of CHF 117.55B in April 2009 and declined to CHF 85.11B in January 2010. However, the level remains high compared with CHF 40B before global crisis in 2008/09. In order to remove excess funding in the market, the SNB may implement operations to raise the 1-week repos, which currently stays at 0.05%, in coming months.