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Swiss National Bank Keeps Monetary Policy Unchanged

Posted: Thursday, September 24th, 2020

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No surprises from the Swiss National Bank (SNB) – it kept the monetary policy unchanged yesterday. The SNB meets quarterly and releases its monetary policy based on the following elements: an inflation forecast, price stability, and the policy rate.

This is the central bank in the developed world that has the lowest interest rate – set at -0.75% for several years now. As it fights deflation and a strong currency, the SNB often uses unconventional measures to reach its objectives.

Swiss National Bank

The SNB – An Unusual Central Bank

Unlike other central banks, the SNB releases its statement only once every three months. In sharp contrast with the ECB (every six weeks) or the RBA in Australia (every month), the SNB does not feel the need to meet so often.

However, the SNB is one of the most active central banks in the world. In fact, it is a bank like no other, a combination of a central bank and a hedge fund.

It has large participations in foreign assets (e.g., it holds participations in U.S. technology companies like Tesla, Amazon, Microsoft), and it is also listed on the Swiss stock exchange. How many central banks in the world do that?

What the Swiss National Bank Said This September

First, it keeps the SNB policy rate and the interest on sight deposits on the central banks at -0.75%. The SNB fights deflation (i.e., negative inflation) and does not see any change for the rest of the year. Inflation in Switzerland runs at -0.6% currently. Only in 2021 and 2020, the SNB sees inflation coming back in the positive territory, albeit timidly.

Second, the central bank still views the CHF as overvalued. A strong currency puts pressure on inflation and dampens the central bank’s effort to meet its price objective of a 2% target. Therefore, the Swiss Central Bank often intervenes to counter the CHF appreciation trend. At this meeting, in particular, the SNB expressed its willingness to intervene more strongly in the FX market.

Finally, the expansionary monetary policy continues via the COVID-19 refinancing facility (CRF). Together with the willingness of the SNB to intervene to stem the franc’s appreciation, the low interest rates provide optimal conditions for the economic activity to stabilize.

To sum up, the SNB signals it will not tolerate a (much) higher CHF without actively intervening. It does so constantly, and sometimes using indirect channels. For instance,  to build its foreign assets portfolio, the central bank sells CHF and buys USD to pay for the participations. In doing so, it effectively slows down the CHF appreciation.

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