Forex Trading Library

Can We Expect the SNB to Cut?

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SNB governing board member Andrea Maechler has stated that the bank is keeping a close eye on the current economic situation, and, that if deemed necessary, the bank will act accordingly.

Their willingness to take action depends on how the current crisis pans out. Will it be short-lived or spiral out of control?

In normal times, we wouldn’t even make a calculated assessment on whether the SNB would opt-in for a rate cut. But times right now are the farthest thing from normal there is.

Central Banks Pledge

Central banks around the world have proceeded with aggressive interest rate cuts this week.

The trend started with the Fed, which cut rates twice in less than 2 weeks by a total of 100 basis points. It then continued with other major central banks, including the RBNZ, RBA, and BOE.

So, will the SNB do their bit and announce an interest rate cut? Let’s turn the clock back a little.

Will They Cut?

The SNB has kept its interest rates at a record low of a negative 0.75% since 2015. Thus, they are reluctant to cut any further.

The SNB’s reluctance to cut is perhaps a little bolstered by the ECB’s action.

ECB president Lagarde was expected to follow on the pledge and cut interest rates by a minimum of 10 basis points, but she failed to deliver.

Therefore, the SNB is likely to follow the ECB’s lead and shy away from slashing interest rates. Swiss banks are already under pressure and any further burden would cause serious problems. Not to mention this could lead to serious cash hoarding.

The Swiss banks want the currency to weaken to make exports more lucrative. However, their attempts have yielded little to no response. They are forced to keep FX intervention on to keep euro-dominated assets in check.

Weakening their currency by keeping rates at ultra-low levels hasn’t truly worked either since 2015. The Swiss franc continued on with safe-haven flows.

This suggests that they are more interested in increasing the stimulus package than in cutting rates.

Lower Rates vs Stimulus

While monetary policy can’t really fight against a pandemic, these policies, if properly structured and deployed, can bring some kind of normalcy to business sentiment.

With the SNB looking for signals at the ECB for policy changes, they are most likely going to increase the stimulus package and FX intervention rather than cut.

This, however, could start a new feud with the US, as SNB is already on the watch list of currency manipulators.

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