The decision by the SNB to scrap its currency ceiling five years ago coincided with it slashing interest rates to a record low to reduce the attractiveness of holding Swiss francs. Alas, this ‘deterrence effect’ is not what it used to be: whereas the gap between Swiss and euro-zone interest rates widened to 55bps in January 2015, it has narrowed to just 25bp following the ECB’s slow-motion easing cycle. (See Chart 1.) What’s more, if our view that the ECB will be forced to loosen policy again proves accurate, the gap will narrow even further later this year. This will surely push the franc higher against the euro. The SNB has relied on FX interventions to counter bouts of upward pressure on the franc since 2015, but we think it is only a matter of time before it acts to re-widen the interest rate differential. Accordingly, we forecast a rate cut, to -1.00%, albeit not until the second half of this year.
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