The SNB only has unfavourable options – Commerzbank

The Swiss National Bank's (SNB) decision is today's highlight. Decision-makers are faced with a challenging choice: the inflation rate has fallen steadily in recent months and is now approaching the lower limit of the target range of 0% to 2% year-on-year. At the same time, the Swiss franc has continued to appreciate, which has further slowed the rise in consumer prices in an open economy such as Switzerland's, Commerzbank's FX analyst Michael Pfister notes.

CHF has already recovered from the US tariff shock

"Recent years have demonstrated that an interest rate of -0.75% is the absolute lower bound for the SNB. Now that the SNB has reached an interest rate of 0%, only 75 basis points remain for further cuts (see the lower left figure). Moreover, it hardly makes sense to exploit the interest rate leeway to the extreme outside of crisis phases. This is because the SNB would then lack the leeway to react to a sudden crisis."

"In principle, the SNB could intervene more strongly in the foreign exchange market by buying foreign currencies to weaken the franc. However, this also seems to be an unfavourable option from the SNB's perspective. Despite all its assurances that it is prepared to do so, it has hardly intervened at all in the last five quarters (see the lower right-hand figure). This is unlikely to change in the coming weeks. Given the considerable volatility, the SNB is unlikely to want to take on new currency risks, especially since it is trying to reduce its balance sheet. Furthermore, officials certainly do not want to attract the attention of the US administration by artificially weakening their own currency."

"Since the end of last year, we have therefore been expecting the SNB to end its cycle of interest rate cuts for the time being after the June move to 0%. While it may reiterate its willingness to introduce negative interest rates if necessary, it is likely to reserve such a step for an emergency. However, in recent weeks, the market has moved in our direction, so such a scenario is only likely to provide slight support for the Swiss franc which has already recovered from the US tariff shock."