SNB to Stand Firm After Intervention Frenzy to Tame Franc Gains

Swiss National Bank President Thomas Jordan has taken his foot off the pedal after the most aggressive currency intervention in five years early in the outbreak of the coronavirus pandemic.

Credit Suisse Group AG calculates Jordan and his colleagues spent more than 90 billion francs ($98 billion) on interventions in the first half of 2020 as the currency rose to a five-year high. But they won something of a reprieve over the summer thanks to the European Unions historic spending package and a rise in the euro. The recession is also proving less deep than initially feared.

“Switzerland is getting out of this crisis rather well,” said Nadia Gharbi, an economist at Pictet & Cie in Geneva. “But I think they will be quite prudent.”

Jordan has admitted the SNB intervened “more strongly” this year, and he has reason to keep the threat of action alive this week.

Britain‘s divorce from the EU single market, the Federal Reserve’s loose monetary policy stance, and the U.S. presidential election in November, all have the potential to stir up trouble for the SNB, whose monetary policy hinges on limiting fallout from an overvalued currency. Also hanging over Switzerland is a U.S. Treasury review that could see the country labeled a currency manipulator.

Along with salvos of interventions, a deposit rate of -0.75% is the SNBs main tool for fending off the threat of deflation caused by the rallying currency. Goldman Sachs Group Inc. and UBS Group AG are among those predicting no change to the rate on Thursday.

Disinflation

The SNB has forecast falling prices in Switzerland this year and next

Source: Swiss National Bank June policy statement

In June, the SNB predicted Switzerland‘s inflation rate will be negative this year and next, with only modest price growth in 2022. The central bank’s price-stability definition is positive rates of inflation below 2% over the medium term.

With inflation very weak, “the SNB will have to live with a reality that is not satisfactory,” said GianLuigi Mandruzzato, a strategist at EFG Bank in Switzerland. “At best they can try to limit the damage.”

— With assistance by Richard Jones, and Craig Stirling