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SNB Keeps Rates at Zero, Swiss Franc Dips
Developing
In Short: The Swiss National Bank (SNB) kept interest rates unchanged at zero, leading the Swiss Franc to dip to four-month lows.
The Swiss National Bank (SNB) announced it would maintain its policy rate at zero for a fifth consecutive meeting, according to a decision made after its quarterly monetary policy review.
SNB Chair Martin Schlegel noted that the recent depreciation of the Swiss Franc partly reflects widening interest rate differentials with other currency areas, making the currency less attractive compared to the Euro and the US Dollar.
Petra Tschudin, a member of the SNB Governing Board, highlighted that Swiss GDP growth was exceptionally strong in the second quarter, driven by robust activity in the chemicals and pharmaceutical industry, but the central bank expects growth to moderate in the coming quarters.
The EUR/CHF pair gained 0.24% on Thursday, trading around 0.9415, and reached an intraday high of 0.9433 following the SNB's decision. The USD/CHF pair also saw a bounce, reaching 0.8269, its highest level since late May.
The SNB acknowledged the strong GDP growth but warned of high inflationary pressures and an uncertain economic scenario, leading to a more cautious outlook on future growth.
The Swiss Franc weakened against the US Dollar, falling to fresh four-month lows following the SNB's decision, as the central bank reiterated its willingness to intervene in the foreign exchange market if necessary.
What this adds
The SNB's decision to keep rates unchanged and resist market expectations for future hikes contributed to the Swiss Franc's underperformance, according to Brown Brothers Harriman.
Background
The Swiss National Bank denied manipulating the Swiss franc as the currency strengthens ahead of its policy announcement.
What's still developing
- The pair benefits from weakness in the Swiss Franc (CHF), while the Euro (EUR) also finds support from stronger-than-expected German economic data.
- The President of the SNB, Martin Schlegel, endorsed those views, affirming that " low interest rate boosts Franc appeal for carry trade", a practice consisting of borrowing a low-yielding currency to buy a higher-yielding one, pocketing the differential.
- These figures have raised concerns that the US economy is overheating, which poses additional pressure on the Fed to hike interest rates.
- Generally, if the SNB is hawkish about the inflation outlook of the economy and raises interest rates, it is bullish for the Swiss Franc (CHF).
- Likewise, if the SNB has a dovish view on the economy and keeps interest rates unchanged, or cuts them, it is usually bearish for CHF.