At 8:30 am GMT tomorrow, the Swiss National Bank (SNB) will announce its latest monetary policy decision. What can we expect from this event?
What Happened in the Past
The central bank is expected to maintain its LIBOR rate at the historically-low range of 0% to 0.25% for yet another month, just as they did in their previous rate decision.
Back in its December monetary policy announcement, the SNB reiterated its “utmost determination” to hold on to the EUR/CHF floor established in September 2011. The central bank emphasized that it would keep buying foreign currencies in “unlimited quantities” just to be able to keep franc rallies at bay.
Between a Rock and a Hard Place
The most recent foreign currency reserves report revealed that the EUR/CHF peg is starting to become too expensive for the SNB to maintain. The central bank’s foreign currency reserves amounted to 427.5 billion CHF in February, a sum that is equal to nearly 75% of its total GDP.
Keeping the franc undervalued against the euro has shielded the Swiss economy from a sharp economic downturn but it does add pressure on the SNB to keep interest rates at their historical lows.
An interest rate hike could spark demand for the franc, which would cause it to appreciate – something that the SNB is keen to avoid. However, the low interest rate environment is causing some headaches, particularly in the housing sector.
For the past few years, prices of owner-occupied properties in Switzerland have risen by an average of 5% each year. The biggest bank in Switzerland, UBS, noted that this resulted in a jump in the price-to-income ratio from 4 to 6 in the past 12 years hints at the possibility of a housing bubble forming. The SNB has been trying to prevent this from happening as it raised the capital required for banks to hold against mortgages.
The SNB’s unwavering commitment to weaken the domestic currency through intervention has also raised a lot of criticism from the general public. In 2010, it was reported that the central bank experienced a record 19 billion CHF loss.
The huge loss resulted in a big blow to the annual dividends the central bank pays to Switzerland’s 26 cantons (a canton is like a state in the U.S.) for the next few years. Needless to say, many people showed their disapproval.
What is expected to happen now?
For the upcoming statement, the SNB is widely anticipated to maintain the three-month LIBOR rate at 0% to 0.25% again. In the accompanying statement, however, we could hear something different as EUR/CHF has eased off its lows.
Now, I’m not saying we’re definitely going to see something new from the central bank, but there is a small possibility that the SNB could soften its tone with regards to the 1.2000 floor. After all, as of this writing, the pair is currently trading at 1.2340, more than 300 pips higher from where it was in the previous rate decision.
If the SNB eliminates the words “utmost determination” (to enforce the minimum exchange rate) from its statement, then we could see EUR/CHF fall back down to 1.2000. Be extra careful trading the Swiss franc tomorrow folks, we can never be sure of what is going to happen!