SNB lurking in market after franc's muted ECB reaction
ZURICH: The Swiss National Bank could boost foreign currency purchases to prevent the franc from strengthening after the European Central Bank (ECB) delivered a bigger than expected stimulus package today, experts said.
However, traders and economists said the ECB's move to expand its monthly asset purchases to 80 billion euros ($88 billion) and cut all three of its interest rates had not heightened pressure on the SNB to follow with its own rate cut at its quarterly policy meeting on March 17. The ECB's 10 basis point deposit rate cut was broadly in line with consensus, but the 20 billion euro boost to its monthly stimulus spending came as a surprise. "The most likely outlook for next week is still probably that the SNB will keep its deposit rate unchanged at -0.75 percent," said Credit Suisse economist Maxime Botteron.
But the ECB's increased asset buying could lead the SNB to step up currency intervention, he said. "From the SNB's perspective, the most logical reaction would be to intervene more in the foreign exchange market, in order to match the balance sheet expansion of the ECB in terms of percentage of GDP," Botteron said. The SNB declined to comment on the ECB's policy decision. Markets lowered expectations for a further rate cut by the SNB in March following the ECB's policy announcement. Futures contracts for three-month franc interest rates fell to 100.80 from 100.85 before the announcement, pricing in an average expectation for Swiss rates of -0.80 percent, just a fraction below the current level of the deposit rate.
"At the end of the day, the SNB will react to the Swiss franc," UBS economist Alessandro Bee said. "So the SNB comes under pressure if the Swiss franc appreciates. As long as it's not the case, or if foreign exchange interventions are enough (to counter the franc's appreciation), the SNB can relax and continue with its current LIBOR rate." The euro fell sharply against the franc in the five minutes following the ECB announcement, from 1.0956 francs per euro at 1245 GMT to 1.0891 by 1250 GMT, but pared these losses by 1315 GMT and then sharply overtook the morning's rates in the following hour.