The Swiss National Bank kept its policy rate at 0% after its September discussions. It said a weaker franc had eased monetary conditions and that heightened willingness to intervene in currency markets was no longer necessary. The franc's appeal as a funding currency grew as interest-rate differentials widened.
The Swiss National Bank held its policy rate at 0%, judging prevailing monetary conditions appropriate to ensure price stability over the medium term. Its September discussions also showed that the franc had become more attractive for borrowing. Policymakers saw less need for a stepped-up currency stance.
Franc draws carry-trade demand
Widening international interest-rate differentials and low exchange-rate volatility had increased the franc's attractiveness as a funding currency in a carry trade, according to the SNB's discussions. The franc depreciated approximately 3% in trade-weighted terms between June and September.
Swiss market interest rates rose slightly over the same period. However, the SNB concluded that the currency's depreciation more than offset that tightening effect, leaving monetary conditions easier. The Governing Board also noted that safe-haven demand for the franc had remained limited.
Inflation edges higher
Even so, the SNB considered conditions consistent with price stability despite stronger economic activity. Headline inflation reached 0.8% in August, primarily reflecting higher oil-product prices, while trimmed-mean core inflation stood at 0.6%.
The Governing Board acknowledged that prolonged elevated energy prices could generate second-round inflation effects. It found little evidence of such pressures emerging, and inflation expectations remained well anchored.
Intervention stance relaxes
The SNB reiterated its willingness to remain active in foreign exchange markets when necessary. According to the SNB: "An increased willingness to intervene is no longer necessary in the current environment."
The shift reflects easier monetary conditions after the franc's depreciation, not a withdrawal of the broader intervention option.
Source: ActionForex
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