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SNB plays down the Swiss franc rise

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SNB plays down the Swiss franc rise

The Swiss National Bank seems unconcerned by the recent rise in the franc. In this Macro Flash Note, GianLuigi Mandruzzato looks at the fundamentals of the franc exchange rate and the outlook.

GianLuigi Mandruzzato
GianLuigi Mandruzzato

The Swiss National Bank has reconfirmed its expansionary monetary policy stance, based on negative interest rates and the readiness to intervene in foreign exchange markets to counter any excessive appreciation of the Swiss franc.

While the decision was as expected, the policy meeting was interesting for several reasons. Compared to September, the SNB revised upwards its conditional inflation forecasts for 2022 but left them unchanged and below 1% yoy for 2023 and 2024. Despite robust GDP growth - expected at 3.5% in 2021 and 3% in 2022 - inflation over the policy-relevant horizon is expected to remain at the low end of the 0-2% range which the SNB uses to define price stability. This reflects the expectation that energy prices and supply chain bottlenecks will moderate over time. Hence, the SNB has signalled that it does not feel much pressure to change monetary policy for some time to come.

Moreover, during the press conference after the Board meeting, President Jordan explained that the impact of the franc's rise has been mitigated by high inflation in other countries, so that the real exchange rate, adjusted for consumer price inflation (CPI), has remained almost unchanged since the start of the pandemic (see Chart 1).

Chart 1. Swiss franc exchange rate indexe
(Dec. 2008 = 100)

SNB_Dec1.png
Source: SNB, JP Morgan, Refinitiv and EFGAM calculations.

However, the picture is different when looking at producer price inflation (PPI) differentials (see Chart 1).1 On this measure, the franc has depreciated by 7.5% since the start of the pandemic, returning to levels seen in the late 1990s. Furthermore, the recent widening of the PPI inflation differential between Switzerland (3.3 % yoy in November) and the eurozone (21.9 % yoy in October) and the US (13.6 % yoy in November) implies that the estimated equilibrium Swiss franc exchange rate2 has risen substantially against a basket composed of the US dollar and the euro (see Chart 2). This suggests that the Swiss franc may strengthen further and that reaching parity on the EUR/CHF exchange rate is only a matter of time.

Chart 2. CHF exchange rate basket and PPP

SNB_Dec2.png
Source: SNB, JP Morgan, Refinitiv and EFGAM calculations.

PPI is considered because it is a timely proxy for export prices and it is available at monthly frequency for most economies.
Based on Purchasing Power Parity (PPP).