CHF: SNB Maintains Its Loose Monetary Policy - For Now

As widely expected the Swiss National Bank (SNB) held its target for the three-month Libor unchanged at 0.00-0.75% and reiterated its intention to keep it within the lower end of the range - i.e. around 0.25%. Moreover, the SNB kept its commitment to intervention on the currency market, stating that it “…will act decisively to prevent an excessive appreciation of the Swiss franc against the euro”.

SNB more positive on the economic recovery

Strong activity data out of Switzerland in recent months has not gone unnoticed by the SNB, which opted to revise its growth forecast higher to 1.5% for 2010 - this is almost twice the growth previously expected (2010 real GDP growth expected to be between 0.5- 1% in December). While the SNB is now recognising that the economic recovery has become more tangible it continues to emphasise that great risks remain due to various after-effects of the crisis on the global economy. This demands time to assess the sustainability of the recovery before turning to tighter monetary policy - time that the SNB indeed has, due to the still low level of underlying inflation.

Indications that risks are becoming more symmetric

The SNB continues to emphasise the risk of deflation, should additional shocks hit the economy. However, as the recovery is maturing it has also begun emphasising inflationary risks - not least on the housing market. Not only does the SNB’s inflation forecast (which assumes unchanged interest rates) show that inflation is expected to break above the 2% target by 2010, if monetary policy is not tightened, but it is also warning banks and borrowers about the potential risks associated with too high credit creation in low growth environment. Hence, indicating that SNB is beginning to view risks as more symmetrical as opposed to predominantly skewed to the downside.

2010 expected to see the SNB move toward the exit

In general, we remain optimistic about the sustainability of the global recovery and expect the coming quarters to see also the economic improvement in Switzerland mature. This should see the still high level of excess capacity in the economy begin to narrow and in turn reduce deflationary risks. Hence, the current emergency setting of monetary policy should prove increasingly inappropriate, wherefore the SNB is expected to begin tightening monetary policy before year-end. However, with underlying inflation at a very low starting point we currently expect it to be more likely that the first interest rate hike will come at the December meeting rather than the September meeting. Before that, however, the SNB could opt to let the 3M LIBOR move back toward the mid-point of the 0.00-0.75% target range and allow the franc to appreciate further.

Risks skewed to the downside for EUR/CHF

We are currently forecasting EUR/CHF to reach 1.44 on a six-month horizon, but are considering factoring more franc strength given the current outperformance of the Swiss economy. In the short-term, however, the SNB is likely to intervene on the currency market, should EUR/CHF move abruptly lower.

Danske Bank
http://www.danskebank.com/danskeresearch

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