SNB resists temptation to lower interest rates

The franc has been under pressure since the SNB's policy u-turn in January Keystone

The Swiss National Bank (SNB) has decided against moving interest rates into even deeper negative territory. The central bank opted on Thursday to keep the benchmark rate at -0.75% for both ordinary savers and banks depositing their money at the SNB.

The announcement follows hard on the heels of a European Central Bank (ECB) decision to make commercial banks pay more to stash their money in the ECB’s coffers. However, the ECB crucially declined to speed up the pace of its quantitative easing programme on December 3, which would have placed the franc under more pressure.

“Despite depreciating somewhat in recent months, the Swiss franc is still significantly overvalued,” the SNB said in a statement on Thursday. “The negative interest rate and the interest rate differential with other currencies make the Swiss franc less attractive, and continue to help weaken it.”

“At the same time, the SNB will remain active in the foreign exchange market in order to influence the exchange rate situation, as necessary.”

The United States Federal Reserve is to make its monetary policy announcement next week. Some economists predict a rate rise, which could give the franc more breathing space.

However, Andreas Ruhlmann, a market analyst at the brokerage firm IG Switzerland, expressed “disappointment” by the SNB’s inaction.

“First it would have been a great opportunity for the SNB to send a strong signal to the market that it has the firepower to withstand further easing from the ECB,” he said in a note. “Second the Swiss economy clearly kept on deteriorating over the last quarter, and a weaker franc would have provided much needed relief.”

Export woes

The exchange rate between the franc and the euro has been the cause of huge concern for Swiss manufacturing exporters ever since the SNB abandoned its defence of the franc on January 15. Since then the franc has appreciated by 10% against the euro.

In the same day that it gave up printing money to keep the euro exchange rate above CHF1.20, the SNB lowered its three month Libor target range to between -0.25% and -1.25%. It also introduced the -0.75% charge on sight deposits.

Those rates have stayed the same throughout 2015 with the franc trading largely in a band of CHF1.05 to CHF1.10 against the euro.

On Thursday the SNB justified its decision to keep rates on hold by saying that its inflation prognosis remained broadly the same as in September. It expects prices to fall -1.1% this year and -0.5% in 2016 before rising into positive territory in 2017.

The central bank’s gross domestic product (GDP) – or economic growth – forecast remained at just under 1% this year and 1.5% in 2016.