Swiss policy alternatives looking more attractive

The latest inflation data make uncomfortable reading for the Swiss National Bank (SNB) and makes it more likely that the central bank will make another stab at trying to weaken the Swiss franc at some point in the not too distant future. The fall in the annual rate from -0.7% to -0.8% was broadly in line with expectations. In absolute terms, prices are now at levels last prevailing in September 2010. Before the current cap was put into place, it’s understood that the authorities looked at a range of measure for containing franc strength, including capital controls and negative interest rates. As times goes on, it’s looking more likely that these will have to be put back onto the agenda.

The issue at this point in time is that the SNB has done a good job in credibly holding its ground with regards to the current floor to EUR/CHF of 1.20. To move that higher would risk goading the markets into a tougher battle that the SNB may have a smaller chance of winning. Although we only have data up to November, there are few signs that the cap to the CHF has substantially deterred overseas investors. Sight deposits of overseas institutions are less than 2% lower, when comparing September to November vs. the prior six-month period, so although there are a lot of factors determining investment flow as well as rates, on the face of it there are few signs that investors have been deterred by the potential for further intervention. Imposing negative rates for overseas deposits and/or capital controls could prove to be the more favourable route from here, with less scope for reputational disaster.