SNB dumps LIBOR, sticks with its loose monetary policy

LIBOR is dumped

The Swiss National Bank announced its plan to dump LIBOR rate, joining a shift worldwide after the manipulation scandal put shadow on the credibility of this benchmark. Libor has been used in Switzerland for more than 20 years, but for some time the policy makers have been working on replacing it. Officially LIBOR will be stopped used in 2021. LIBOR in Swiss franc has been used as a rate for financial products worth 6.5 trillion dollars and for pricing about 80% of banks’ loans. Thus, the switch to new rate poses great challenges for the financial market.

New policy rate

Together with challenges though, comes some benefits, that the SNB is counting on. The newly introduces SNB policy rate will focus on short-term rates on the money market, that can be measured by transaction based SARON, aka Swiss Average Rate Overnight. SARON has been used for a decade and is administrated by SIX, the operator of the stock market. Now SARON is supposed to be close to the rates announced by the SNB. Since the new rate is based on binding quotes and trades, the market segment will be now more liquid and broader. The SNB counts on quick and smooth integration of SARON into the financial product, that will make replacing LIBOR easier and less problematic. The central bank also stresses that the responsibility to prepare for post-Libor era lies on the market participants that should systematically finish any remaining transition processes.

Loose monetary policy is here to stay

At the same the SNB announced that it plans to stick with the ultra-loose monetary policy that covers keeping very low interest rates and lack of intervention, even though the CHF is very highly valued. The president of the SNB, Thomas Jordan, seems to acknowledge that the Swiss franc has been even somewhat stronger in recent days, but still refers to it as highly valued instead of using more hawkish description. Meanwhile investors tend to safe haven that is CHF – they buy Swiss francs, as the global economy is hurt by trade wars of USA, among others. As other central banks boost their currencies, Jordan realizes the global economic risks are huge concerns and more pronounced than during the previous SNB monetary policy assessment, but still sticks to the ultra-loose monetary policy. Jordan believes that there is still a space for the SNB to react in case of any shock situations on the market.

Market’s reaction

The currency market reacted with strengthening the Swiss franc. It went up 0.2 percent in the exchange rate against the euro to 1.12127 euros. Earlier in June CHF hit the highest level in two years by reaching 1.11178 euros.

New inflation forecasts

Replacing LIBOR as of 2021 has implications for three-year forecast, as medium-term economic outlooks are supposed to be based on a single rate, as per SNB wish. The SNB raised inflation forecast for 2019 and 2020, whereas for 2021 it has lowered them a bit to 1.1%. The three year-forecast shows that inflation should be always less than 2%.

Cross-border commuters in Switzerland

The decisions of the Swiss National Bank have an indirect influence on hundreds of thousands of frontaliers in Switzerland. Any decision by the National Bank can have a significant influence on the franc to the euro exchange rate, even if the decisions are anticipated. An increase in interest rates would make it more attractive for investors to hold capital in Swiss francs and they would therefore sell currencies such as euros and buy francs. The EUR CHF exchange rate would fall due to the stronger Swiss franc. For cross-border commuters, this would mean a good euro franc exchange rate.

Regardless of the euro franc exchange rate, it is important to find the best exchange rate when changing euro to francs. Use our Euro Franc currency converter and find the best euro exchange rate in Switzerland.