Nordic & Swiss Economics

SNB to loosen policy again next year

Nordic & Swiss Economics Weekly
Written by David Oxley

The return of deflation to Switzerland in October lends support to our dovish view that the SNB will loosen policy further next year. Next week, we expect the release of the services PMI from Sweden to add to the evidence that the economy contracted in Q3, and the Central Bank of Iceland to cut its policy interest rate to a  fresh all-time low.

Deflation rears its head again in Switzerland…

Perhaps fittingly in the week of Halloween, data released this morning showed that deflation came back to haunt the SNB in October. (See here.) With the KOF Economic Barometer confirming that the economy remains frightfully weak (see here), and the franc still about 4% stronger against the euro than it was a year ago, we forecast inflation to remain below zero in much of 2020.

…and justifies the SNB’s uber-dovish stance

The SNB is of course used to the dearth of price pressures in Switzerland so it will not be overly spooked by the news. However, one week after the Riksbank laid the groundwork for its (in our view premature) exit from negative interest rates (see here), recent events have dealt a blow to anyone hoping that the SNB will follow the Swedes’ lead.

Thomas Jordan, Chairman of the Governing Board, was his usual dovish self in a speech to the pension industry on Thursday when he drove home his oft-repeated message that negative interest rates and the Bank’s willingness to intervene in the FX market were “essential” to relieve pressure on the franc. In a week in which the Fed cut rates again, he explicitly warned about upward pressure on the franc from narrowing interest rate differentials and said that negative rates will not be reversed without a “significant” change in global economic conditions.

Mr Jordan’s comments were preceded on Tuesday by confirmation from Martin Schegel – one of the three alternate members of the Governing Board – that the Bank’s decision to make its tiering system more generous to banks gives the SNB “the leeway to keep negative interest rates for a long time or to lower them” (as we argued at the time – see here). (Note that the change to its tiering policy was announced in September but is only effective as of today.)

The modest decline in the franc since early-September, which has coincided with a rise in global bond yields from record lows, has given the Bank some breathing space for now. Nonetheless, given our forecast for the ECB to cut its deposit rate next year, the SNB’s renewed emphasis on interest rate differentials lends support to our view that it will loosen policy before long. While investors expect the policy rate to stay on hold next year, we expect a cut to -1.00% in early-2020. (See Chart 1.)

Chart 1: SNB Policy Rate (%)

Sources: Bloomberg, Capital Economics

Sweden can’t catch a break

The fact that the Swedish manufacturing PMI edged down further below the 50-mark in October adds to the evidence that the economy is far too weak to justify a rate hike later this year. While Swedish policymakers appear dead-set on raising the repo rate in December come what may, we suspect that they will have to change tack in 2020.

Central Bank of Iceland to stay in easing mode

We expect the Central Bank of Iceland to cut its deposit rate by a further 25bp at its meeting next Wednesday (6th), which would take it to fresh all-time low of 3.00%. With inflation dropping to a 12-month low of 2.8% in October, and little sign of an easing in the downturn in the tourism sector, we forecast another 25bp cut at the December meeting.

The week ahead

On the data front, we expect the Swedish services PMI to have remained below the 50-mark for the third time in five months in October (data due for release on Tuesday). Meanwhile, we suspect that private sector production data for September, scheduled for release shortly afterwards, probably fell back in September after the better-than-expected readings in July and August.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time CET

Time (GMT)

Previous*

Median*

CE Forecasts*

Mon 4th

Den

Change in Currency Reserves (Oct, DKK)

17.00

(16.00)

-1.6bn

Tue 5th

Swe

Services PMI (Oct)

08.30

(07.30)

49.8

49.5

Swe

Private Sector Production (Sep)

09.30

(08.30)

+0.6%(+2.9%)

Swe

Riksbank MPC minutes

09.30

(08.30)

Wed 6th

Ice

Interest Rate Announcement

09.55

(08.55)

3.25%

3.00%

Thu 7th

Den

Industrial Production (Sep)

08.00

(07.00)

-1.1%

Nor

Industrial Production (Sep)

08.00

(07.00)

-2.1%(-9.2%)

Fri 8th

Fin

Industrial Production (Sep)

07.00

(06.00)

+0.4%(+4.4%)

Swi

Unemployment Rate (Oct)

07.45

(06.45)

2.3%

2.3%

Selected future data releases and events

Mon 11th

Den

CPI (Oct, EU Harm.)

08.00

(07.00)

-0.3%(+0.4%)

Nor

CPI (Oct)

08.00

(07.00)

+0.5%(+1.5%)

Tue 12th

Nor

Mainland GDP (Q3, q/q(y/y))

08.00

(07.00)

+0.7%(+2.5%)

Wed 13th

Swe

CPI (Oct)

09.30

(08.30)

+0.5%(+1.5%)

Swe

CPIF (Oct)

09.30

(08.30)

+0.5%(+1.3%)

Swe

CPIF Ex. Energy (Oct)

09.30

(08.30)

+0.5%(+1.6%)

Thu 14th

Fin

CPI (Oct)

07.00

(06.00)

0.0%(+0.9%)

Fin

Trend GDP Indicator (Sep)

07.00

(06.00)

(+2.5%)

Swe

Unemployment Rate (Oct)

09.30

(08.30)

7.4%

Fri 15th

Nor

Trade Balance (Oct, NOK)

08.00

(07.00)

-1.2bn

Main Economic Forecasts

Share of

World

GDP

Consumer Prices (HICP)

2018

2019

2020

2021

2018

2019

2020

2021

Switzerland

0.42

2.5

0.5

0.5

1.5

0.9

0.5

-0.3

0.5

Sweden

0.41

2.5

1.0

0.5

1.5

2.0

1.7

1.6

1.8

Norway

0.31

2.6

2.5

1.7

2.0

3.0

2.2

1.6

2.5

Denmark

0.23

1.5

2.0

1.0

1.5

0.7

0.8

0.9

1.3

Finland

0.20

1.7

1.0

0.8

1.0

1.2

1.0

1.0

1.2

Iceland

0.01

4.6

0.0

1.5

2.5

2.3

3.2

2.5

2.7

Sources: Refinitiv, Capital Economics

Key Market Forecasts

Forecasts

Forecasts

Latest

End 2019

End 2020

End 2021

Latest

End 2019

End 2020

End 2021

Swiss policy rate

-0.75

-0.75

-1.00

-1.00

Swiss fr/euro

1.10

1.10

1.10

1.10

Swe. repo rate

-0.25

0.00

-0.25

-0.25

Swed. Kr/euro

10.73

11.00

11.00

10.50

Nor. depo rate

1.50

1.50

1.50

1.50

Nor. Kr/euro

10.19

10.30

9.80

9.30

Den. depo rate

-0.75

-0.75

-1.05

-1.05

Dan. Kr/euro

7.47

7.47

7.46

7.46

ECB depo rate

-0.50

-0.50

-0.80

-0.80

US$/euro

1.12

1.10

1.05

1.05

Ice. depo rate

3.25

2.75

2.75

2.75

Ice. Kr/euro

138

143

140

135

Sources: Refinitiv, Capital Economics


David Oxley, Senior Europe Economist, +44 20 7811 3906, david.oxley@capitaleconomics.com