The passing week has been a hot time in central banking. Just a day after the FOMC meeting, the Swiss National Bank held an extraordinary press conference. What is the news from small Switzerland and how can it impact the gold market?
The SNB decided to leave interest on its sight deposits at -0.75 percent (with the exemption thresholds unchanged) and also to keep the target range for three-month Libor unchanged at between –1.25% and –0.25%. Therefore, this time the SNB did not shock markets as it did in the January when it suddenly removed the Swiss franc’s peg to the euro.
However, the SNB cuts its projections on GDP growth. For 2015, the central bank expects real GDP to increase by less than 1 percent, while in December it expected annual growth of some 2 percent. It proves that abrupt exchange rate movements are usually harmful to the economy and that the Swiss economy is slowing down right now.
What is also interesting is that the SNB held an extraordinary press conference (usually there are only two press conferences during a year, in June and December), during which Thomas Jordan, president of the SNB, threw some light on the reasons of the peg’s removal. He admitted that the main reason had been concerns about the costs of maintaining the peg during the strong depreciation of the euro expected after the start of the ECB’s QE (this was what we believed in our Market Overview). Jordan explained in his introductory remarks:
The further depreciation of the euro against the dollar after 15 January, and following the ECB’s decision on quantitative easing shortly afterwards, is an impressive illustration of how enormous the additional pressure would have been to maintain the minimum exchange rate. Had we delayed the discontinuation of the minimum exchange rate, this would only have been at the expense of an uncontrollable expansion of the SNB balance sheet – by hundreds of billions of Swiss francs, and potentially several times Swiss GDP. Such an expansion would have severely impaired the SNB’s future ability to conduct monetary policy and substantially jeopardized the fulfillment of its mandate in the long term.
The SNB’s president also explicitly stated that the motivation behind introducing negative interest rates was to weaken the Swiss franc. This is how central banks are trying to ensure stable money. Well, welcome to the currency wars.
What about the possible impact of the SNB’s decision on the gold market? The central bank kept its interest rates unchanged, so it will not affect gold prices. However, the SNB can lower the interest rates or intervene in the currency market in the future. Indeed, Jordan explicitly said that “the Swiss franc is significantly overvalued”, so the SNB will “remain active in the foreign exchange market, as necessary, in order to influence monetary conditions”. Thus, it seems that the SNB is waiting right now in order to better assess the ECB’s QE; however it can lower its interest rates if the ECB cuts further its interest rates.
In a sense, Jordan admitted that the SNB is a hostage to the ECB:
Low interest rates are a global phenomenon and some other countries, especially in the euro area, also have negative rates. Switzerland cannot disassociate itself from such developments.
Summing up, the SNB kept its interest rates unchanged, however it can lower them (or directly intervene in the foreign exchange market) in the future in order to further weaken the allegedly overvalued Swiss franc. Such a move (perhaps forced by the ECB’s actions) could lower the SNB’s credibility and belief in the Swiss franc as a safe-haven, which would positively affect gold prices, as there will be one less safe-haven currency in town, or at least gold will become relatively cheaper to hold.
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
Gold News Monitor
Gold Trading Alerts
Gold Market Overview
