26 Jan 2015
Further policy rate cut by the SNB to come - Nomura
FXStreet (Bali) - Nomura FX Strategists expect further policy rate cuts by the SNB, with the next meeting on 19 March possibly the date the Central Bank chooses to confirm a further reduction in rates.
Key Quotes
"The combination of the ending of the exchange rate floor and the 50bp policy cut is expected to be deflationary for the Swiss economy. Unless CHF starts depreciating significantly, we expect the SNB to embark on the further policy stimulus this year."
"The main policy tool for the SNB has shifted to the policy rate from the exchange rate floor so we think a further rate cut is the likely next policy step for the Bank, while FX intervention to ease CHF appreciation pressure is also still likely. To ease CHF appreciation pressure, the SNB will also lower the threshold for the sight deposits subject to negative rates. To enable negative real rates in the economy, at least a further 50bp rate cut is likely necessary."
"There may be a couple of side-effects from a further rate cut. For example, a further policy cut could increase the risks of overheating in the housing market. However, to prevent any potential overheating in the mortgage market, macro-prudential policy will likely be tightened further The impact of negative rates may weaken, as there could be a shift from reserve money into cash to avoid costs from negative rates."
"However, for the sight deposit held by domestic banks, the exemption threshold for the negative rates is defined as “minimum reserve requirement times 20 +/- decrease/increase in cash holdings.” The adjustment of threshold owing to changes in cash holdings should reduce the incentive for domestic banks to convert their reserve money into cash to avoid costs from negative rates."
"The SNB's decision to scrap the floor can be viewed as evidence of the SNB's higher tolerance for deflation, which may have a negative impact on inflation expectations and the credibility of the SNB's determination for the price stability. The removal of the floor is also seen as evidence of the SNB's reluctance to increase FX reserves further, which could invite further speculative EUR/CHF short positions. Thus, we think the Bank needs to cut the policy rate relatively soon to show its commitment to price stability and to avoid further tightening in monetary conditions, likely at the next meeting on 19 March."
Key Quotes
"The combination of the ending of the exchange rate floor and the 50bp policy cut is expected to be deflationary for the Swiss economy. Unless CHF starts depreciating significantly, we expect the SNB to embark on the further policy stimulus this year."
"The main policy tool for the SNB has shifted to the policy rate from the exchange rate floor so we think a further rate cut is the likely next policy step for the Bank, while FX intervention to ease CHF appreciation pressure is also still likely. To ease CHF appreciation pressure, the SNB will also lower the threshold for the sight deposits subject to negative rates. To enable negative real rates in the economy, at least a further 50bp rate cut is likely necessary."
"There may be a couple of side-effects from a further rate cut. For example, a further policy cut could increase the risks of overheating in the housing market. However, to prevent any potential overheating in the mortgage market, macro-prudential policy will likely be tightened further The impact of negative rates may weaken, as there could be a shift from reserve money into cash to avoid costs from negative rates."
"However, for the sight deposit held by domestic banks, the exemption threshold for the negative rates is defined as “minimum reserve requirement times 20 +/- decrease/increase in cash holdings.” The adjustment of threshold owing to changes in cash holdings should reduce the incentive for domestic banks to convert their reserve money into cash to avoid costs from negative rates."
"The SNB's decision to scrap the floor can be viewed as evidence of the SNB's higher tolerance for deflation, which may have a negative impact on inflation expectations and the credibility of the SNB's determination for the price stability. The removal of the floor is also seen as evidence of the SNB's reluctance to increase FX reserves further, which could invite further speculative EUR/CHF short positions. Thus, we think the Bank needs to cut the policy rate relatively soon to show its commitment to price stability and to avoid further tightening in monetary conditions, likely at the next meeting on 19 March."