What Will SNB Do – Is Rates Cut on Cards?

Signal from Bond Market

When the Swiss National Bank cut rates last time, it came as surprise to investors. But there was a signal that triggered this action – coming from the bond market. Now again it can be observed, as last week the spread between yields on German and Swiss bonds evaporated. When it happened last time, the SNB made a bold move to cut deposit rates to minus 0.75 and also scrapped the cap on the EUR CHF exchange rate of 1.20 – back in 2015 that caused huge shock on financial markets.

Time to Act?

                Does this mean cutting already record low rates further is on the cards? Economists foresees that the SNB will keep interest rates at current level until at least the end of the year. However, there might be a chance of surprise rates cut soon, as signal from bond market is very strong and also CHF exchange rate is hitting new highs against the euro. On Thursday it recorded a five-year high price. The quest of the SNB to keep CHF exchange rate not too strong is still very much alive. Additionally, the coronavirus pandemic provided new trouble for financial markets. The SNB already makes more aggressive moves on the foreign exchange market already due to the coronavirus crisis. All this means the surprise cut rate might be on cards, as some logical move, taking into he accounts the economic shock breaking out in Europe and the US.

Waiting Game

                There are predictions that Swiss franc exchange rate will climb further to 1.04 per euro this quarter, as its price will get support from other central banks cutting rates which will make investors more eager to buy Swiss francs, concerned safe haven asset. Some analysts claim though that as of now the SNB won’t act. One of the reasons why the SNB won’t cut rates soon is that current negative rates are already very problematic for commercial banks’ profits. Also, the European Central Bank still keeps rates unchanged even though it has increased its bond purchase program. Chances of cutting rates this month are lower than in the previous month with many economists claiming the SNB won’t do anything and will just sit and wait to see how its fiscal policy implemented so far has effects on the financial market. In these troubling times cutting rates will also mean another issue for public that could be scared of negative rates on their savings. As per survey conducted by Bloomberg economists believe the SNB will hold off from cutting rates until the end of 2021.

Interventions to the Rescue

                The economic crisis is imminent due to the coronavirus pandemic. Back in 2008 Switzerland survived financial crisis better than other countries, mainly due to the SNB actions. Now the bank can also minimize economic damage by intervention on the market with huge amount of money. So far, the SNB has been intervening on the foreign exchange market to stop CHF exchange rate from getting too high. Swiss franc is very strong against the euro. This is one of the weak points of the Swiss economy that might make it more difficult to pass the pandemic crisis. These interventions might not be enough to keep CHF in line when turbulences appear in the eurozone – in such situation investors decide not to buy euros and turn to Swiss francs, triggering its high price.