SNB

“Absent significant shock, notably on the currency, the SNB should be in the position to start tightening the policy rate in the near term.” This from the IMF, as it raised its growth forecast for the Swiss economy to 2.4 per cent this year, after 2010 growth exceeded expectations. The Swiss National Bank has maintained a near zero rate since January 2009, officially targeting a three-month Swiss franc Libor rate of 0-0.75 per cent.

Mortgage lending standards should also be tackled with better regulation, says the IMF, arguing: “The development of lax lending standards in the mortgage market and increasing interest rate risk call for pre-emptive measures.” While a rate rise should work to reduce mortgage lending, its effects would be “limited”, so “concerns related to mortgage lending should be addressed by macro-prudential instruments.” 

The Swiss National Bank no longer accepts Ireland’s government bonds as eligible collateral in its repo operations. It’s probably not earth-shaking for holders of Irish government bonds, following earlier margin calls on these assets by LCH.Clearnet last year. On the other hand, it’s an interesting window into how at least one European central bank is taking care over its collateral, unlike a few others we could mention.

Modifications to the SNB’s collateral baskets over the last year emerge in this little spreadsheet (Excel file). Several other Irish-domiciled assets also became nicht Repo-fähig in late December 2010, around the time Ireland lost its last AA- credit rating. Anglo Irish medium-term notes, Depfa bonds, etc.

The SNB’s eligible collateral criteria require that securities posted for repo have this AA- rating and that their country of domicile also bears the same rating, which seems open and shut. Until you read that the bank can make exceptions for sovereign securities rated below AA-.

 

UBS, one of Switzerland’s leading banks, has predicted the Swiss National Bank will deliver a 25 basis point rise in interest rates at its policy meeting on Thursday, contrary to a virtually unanimous consensus among other observers for unchanged rates. UBS expects the SNB to switch back to targeting the mid-point of a three-month Swiss franc interbank lending rate band of 0 per cent to 1 per cent, from the current target rate of 0.25 per cent.

The call came despite the Swiss franc hitting parity against the dollar for the first time in 10 months on Tuesday, and as the franc threatened to notch up a fresh record high against the euro after scaling a succession of all-time highs against the single currency in recent weeks. 

The Swiss National Bank may have suffered paper losses of up to SFr10bn (€7.5bn) from huge interventions in the currency markets to restrain the value of the franc.

The central bank is expected by market observers to report a big loss when it publishes second-quarter accounts in mid-August. Economists cannot make a precise forecast, as the SNB does not reveal when, or at what rates, it has sold francs and bought other currencies – mainly euros – in recent months. However, Martin Neff, chief economist of Credit Suisse, said: “It’s certain there will be a big loss.” 

Expect a stronger Swiss franc: the central bank has dropped a key phrase about countering “excessive appreciation” of its currency after several hints (see 1,2). Forex interventions by the SNB are rumoured to have been numerous (see 1,2,3 to name but a few) – but with the euro falling, the franc has been rising in spite of them.

The table below compares today’s monetary policy assessment with its immediate predecessor in March, highlighting key differences. In a nutshell; the franc reference has gone; growth and inflation forecasts are up; as are ‘downside risks’ following the shenanigans in the eurozone. Table after the jump: 

Investors may wonder why the euro is not trading even lower given the almost universal bearish sentiment on the single currency. The answer could lie in Switzerland.

The Swiss National Bank shocked the market on Tuesday by announcing that, as a result of its intervention in the foreign exchange markets, its currency reserves leapt more than 50 per cent last month from $145.6bn in April to $261.9bn in May. 

Expect greater collaboration between the central bank and regulator in Switzerland. They have signed a memorandum of understanding saying they will work more closely together in future.

The two bodies worked more closely during the financial crisis, and fell in love found some common ground. Principal changes/ how it will work

The Swiss franc has dropped 0.2 per cent amid speculation that the central bank sold the currency for the second time today. The central bank refused to comment. It is thought the francs bought euro.

The Swiss franc has been appreciating significantly against the euro. New central bank governor Philip Hildebrand has a stated policy of intervention where necessary to prevent ‘excessive appreciation’ of the franc, which has risen by 0.9 per cent against the euro since the start of the year. 

The Swiss franc has fallen up to 0.3 per cent against the euro after the central bank president said policymakers would seek to prevent its “excessive appreciation”. The Swiss National Bank will “monitor foreign-exchange market developments very closely” even though it doesn’t have a currency target. The statement counters views among some traders that the Swiss National Bank had relaxed its resistance to a stronger currency.

Ralph Atkins

Central banks have started to unwind some of their emergency measures, Ralph Atkins writes in a blog for the Financial Times