(15 JUNE 2019)DAILY MARKET BRIEF 3:SNB: New policy rate, cautious assessment

At its June monetary policy assessment on Thursday, the SNB presented a new instrument. The SNB policy rate replaces the previously used target range for three-month Swiss franc LIBOR. The central bank intends to keep short-term secured Swiss franc money market rates, represented by the SARON (Swiss Average Rate Overnight) index, close to its policy rate. "This change of instrument does not modify the SNB's current monetary policy. […] Although the SARON is an overnight interest rate, it currently differs only slightly from the three-month LIBOR," explains CIO economist Alessandro Bee. He adds that the SNB justifies the introduction of the new policy rate as part of long-term plans to replace LIBOR as a global reference rate.

The SNB is also sticking to its existing course on sight deposits (the interest rate on these remains unchanged at -0.75%). Policymakers continue to regard the Swiss franc as overvalued and assess the situation on forex markets as fragile. Signals from the global economy are characterized as mixed, and the SNB sees more pronounced risks now than in its monetary policy assessment in March. Overall, says Bee, the central bank is slightly more cautious in its assessment than it was three months ago.

What does this mean for Swiss investors? The SNB expects Swiss GDP growth of 1.5% this year – but here, too (as with the global economy), it notes downside risks. The SNB has revised its inflation outlook up slightly. In its conditional inflation forecast, it sees an inflation rate of 0.6% for 2019 and 0.7% for 2020. "The inflation forecast is in line with ours for 2019," says Bee. "For 2020, however, we see slightly stronger inflation momentum."

The economist doesn't expect an interest rate hike until the fourth quarter of 2020 at the earliest; and even then, only if the global economy has recovered by that time. Otherwise, CIO thinks a rate increase could be off the table for the next few years. On the other hand, the current economic risks also raise the specter of a possible rate cut. "Although this cannot be ruled out, in particular in the case of pronounced franc strength, it remains in our view a monetary policy tool of last resort," says Bee. If the franc appreciates, currency market interventions are likely to be the SNB's first choice.