FLASH BRIEF
SNB preview March 2022: The push towards parity

By Jeremy Hawkins, Senior European Economist
March 22, 2022

The crisis in Ukraine has reinforced the Swiss franc’s status as the leading safe haven currency in Europe and left the SNB facing an even harder task as it tries to stabilise its currency. The CHF has been a principal beneficiary of capital inflows triggered by the Russian incursion and earlier this month the central bank took the unusual step of issuing a statement specifically underlining its willingness to intervene. This was the first time that the monetary authority has taken such action since the surprise UK vote to leave the EU back in 2016. This suggests that, even more than normal, the currency markets will feature highly in Thursday’s Monetary Policy Assessment (MPA). However, a cut in the key minus 0.75 percent policy rate still remains unlikely as the governing board already sees the current level as a threat to financial stability over the longer-term.

At the last MPA in December the SNB described the franc as “highly valued”, an assessment that at the time seemed less than aggressive given the strength of the currency. Indeed, it was almost certainly viewed by speculators as a green flag to push the currency even higher. However, it also probably reflected a reluctant acceptance on the part of the central bank that the equilibrium level of the franc was stronger than previously thought. This would explain the relatively limited CHF sales undertaken by the bank in recent weeks as the key EUR/CHF cross-rate has come within almost touching distance of parity. However, allowing a break below parity is another matter. If only for psychological reasons, a fall through EUR/CHF1.00 could trigger a whole new wave of euro selling and CHF buying and it seems very probable that the central bank would not want to see this level broken on anything but a very temporary basis.

Inflation in Switzerland is rising but, compared with its European neighbours, only slowly. The headline rate in February finally crept back above 2 percent for the first time since October 2008. However, the HICP rate (equivalent to the measure used in the Eurozone) was still only 1.9 percent, some 4 percentage points below its Eurozone counterpart. In fact, core CPI inflation was just 1.3 percent. Overall domestic prices were also running at a 1.3 percent rate so what strength there was came mainly from a 4.9 percent yearly increase in import prices. And the latter would have been substantially higher but for the limiting effects of CHF appreciation.

Even so, in line with December, the March MPA’s near-term inflation forecast will be hiked by a sizeable margin to take on board the recent acceleration in prices. Key however, will be the long-term projection which, on the basis of an unchanged policy rate, remained below 1 percent in all of last year’s MPA forecasts and looks likely to stay well short of 2 percent on Thursday.

More generally, economic activity has generally performed slightly better than expected since the December MPA. Econoday’s economic consensus divergence index (ECDI) has been largely in positive surprise territory, albeit not often by very much. In particular, the labour market has continued to outstrip market expectations and another fall in the jobless rate in February left it a tick below its level just before the arrival of Covid. Even so, rising Omicron cases dented consumer spending around the turn of the year, contributing to a sharp slowdown in fourth quarter GDP growth and leaving total output only around its pre-Covid level. In line with the rest of Europe, the real economy will be impacted by the crisis in Ukraine but at least the effects should be relatively limited. Sales to Russia were only about 1 percent of total exports in 2021 and to Ukraine, much less. Even so, with the EU accounting for some 43 percent of the country’s exports, Switzerland will inevitably feel the knock-on effects from weaker growth amongst its European neighbours.

That said, for now leading indicators remain optimistic. Although the SVME PMI and, in particular, the KOF’s economic barometer have fallen well below their respective highs of last summer, both measures are still some way above their historic norms. In other words, at least just prior to the Russian invasion, the economy seemed set for a period of above average growth. Nonetheless, the March readings will need watching closely for early clues about how economic activity might be affected.

At home, Covid continues to be an issue. Almost all restrictions were lifted on 17 February as new cases were falling sharply, albeit from record levels, and hospitals appeared to be managing well. However, since then, cases have begun to climb steeply again. No new measures have been introduced to combat the increase but a mandatory five-day isolation period for people who have tested positive remains in effect until at least the end of March. As such, staff shortages could become more of a problem at the expense of output.

In sum, even more than usual the focus of Thursday’s announcement will be on what the SNB has to say about the Swiss franc. Back in the middle of 2017 it described the unit as “significantly overvalued” and it may be that it will revert back to such phraseology this week. However, with currency investors generally risk averse, preventing additional appreciation even with a cut in interest rates would not be easy. Indeed, the widening inflation gap between Switzerland and its major trading partners suggests that the currency’s fair value is rising all the time anyway. Catching the market long the franc and then intervening aggressively is a tactic that the central bank has used successfully before and could easily be adopted again. Either way though, the bottom line is that in the current international environment, the SNB has a real fight on its hands.