Global competitive devaluation comes to Switzerland

In reaction to the sharp appreciation of the CHF over the past couple of weeks, the SNB announced a rate cut this morning, reducing its 3-month CHF Libor target to 0.00-0.25%, from 0.00-0.75% previously. Given that the SNB was targeting 0.25% within the old range – and 3-month rates were actually below that target – this change in target should be seen mostly as symbolic. However, it also shows that the risks to the monetary policy outlook have shifted significantly and our rate forecast is under review.

The SNB also announced that it would increase the supply of liquidity to banks by raising banks’ sight deposits at the SNB from around CHF30bn to CHF80bn. The idea behind this measure seems to be that, by increasing the liquidity available to banks, some of that liquidity will flow into Euro-denominated assets, thereby reducing the pressure on the CHF. Put differently, the SNB is aiming at the exchange rate channel in this latest ‘quantitative easing’ exercise.