CHF: SNB watches currency as inflation stays near zero – Nomura

Nomura’s Global Markets Research Team argues that Switzerland’s low energy weight in CPI and hydropower reliance limit the inflation impact of higher Oil and gas prices. With inflation around 0.1% and CHF facing safe-haven appreciation, the SNB is prepared to intervene in FX markets, while keeping the policy rate at 0.00% and treating a return to negative rates as a high bar.

Safe-haven flows complicate benign inflation

"Inflation in Switzerland is close to zero (0.1% y-o-y), so some mild inflationary pressures would be welcome in the country. However, Swiss consumers are less exposed to an energy price shock than their European neighbours, as energy makes up a smaller share of the CPI basket than in the euro area (5% vs. 9%) and the Swiss electricity grid draws on significant hydropower production (though imported fossil fuels are important for the industrial sector)."

"A key concern for the SNB at present will be CHF appreciation pressures stemming from the current risk environment, which make FX intervention from the central bank possible. With the SNB policy rate at 0.00%, the SNB’s main tools to prevent deflation as a result of further CHF appreciation are a negative policy rate or FX intervention. SNB Chairman Schlegel has been clear that the bar for a negative policy rate is high. Furthermore, the SNB said in a statement last week that “in view of international developments, we are increasingly prepared to intervene in the foreign exchange market”."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)