SNB Surprises, But Fed Stays Course

The Swiss National Bank surprised the market by announced a negative 25 bp rate on sight deposits and lower the 3-month Libor range to -0.75% to 0.25%. Although SNB President Jordan revealed that it was inflows from Russia that compelled it to intervene in recent days, the fact of the matter is that the negative rate goes into effect the same day as the ECB’s next meeting, January 22. 

The announcement took the market by surprise. The SNB had given no clue at last week’ s quarterly review. The euro immediately shot up to CHF1.21 from just above the floor of CHF1.20. Nearly as quickly the gains were retraced, leaving the euro near CHF1.2040. 

The SNB’s move to negative interest rates is a bit different than the ECB’s. The ECB’s adoption of negative interest rates was to discourage member banks from hoarding liquidity. It was to induce them to lend to each other and to businesses and households.  In contrast, the SNB’s move is aimed at at foreign banks to deter using the franc as a safe haven. The effect on Swiss banks may be marginal as the SNB announced an exemption threshold of 20 times the minimum reserve requirement.    

Of course, the SNB’s move will fan expectations that the ECB will widen the assets it is buying at its January meeting. The market had been moving in this direction. Yet making the market cautious are three things. First is the opposition within the executive board and Germany is not alone in its opposition. Second, the European Court of Justice makes a preliminary and non-binding decision on January 14. Third, Greece may be in the middle of an election campaign and the leading party wants the ECB and other official creditors give more debt relief, which makes buying sovereign bonds, or Greek bonds at any rate, more troubling. 

The second consecutive monthly increase in the German IFO dovetails nicely with the ZEW and the improved orders data.  With monetary policy that was exceptionally easy for Germany, the weakness in the euro and the drop in energy prices is a potent stimulus. The challenge Germany faces stems from the lack of reform in its services and the weakness of its export markets, including China and Russia.