ECB to deliver aggressive QE

SNB scraps floor on EUR/CHF

The Swiss National Bank (SNB) this week surprised the market by abandoning its 1.20 floor on EUR/CHF and simultaneously lowering the target range for the Libor interest rate by 50bp to between -0.75% and +0.25%. The interest rate on the sight deposit account was similarly cut by 50bp to -0.75%.

It appears that the SNB has increasingly regarded the EUR/CHF floor as an unsustainable monetary policy due to possible QE from the ECB and increasing divergence between monetary policy in the euro area and the US. As seen in the chart (bottom right), the SNB’s balance sheet has expanded much faster than other major central banks’ and is now close to 100% of GDP. It is also possible that substantial safe-haven inflows in December and January, not least from Russia, have forced the SNB to step up its intervention in the FX market substantially.

It certainly looks like a fundamental change in the framework for the SNB’s monetary policy although it has indicated that it will continue to intervene in the FX market. Within the new monetary framework there again appears to be a larger reliance on interest rates. EUR/CHF has plunged about 15% in the wake of the announcement. In the short run, we could see further appreciation pressure on CHF from both QE and possible safehaven inflows from uncertainty in connection with the Greek election and Russia. Hence, further interest rate cuts by the SNB cannot be ruled out.

Pre-emptive move ahead of ECB QE

The move by the SNB is to a large extent regarded as a pre-emptive move ahead of next week’s ECB meeting. Hence, the move has also increased expectations that the ECB will deliver a relatively aggressive QE programme next week and bond yields have plunged globally on the back of the SNB’s move. By loosening its ‘peg’ to the EUR, the SNB has created expectations that it will diversify its FX reserves somewhat from EUR. This has added further depreciation pressure on EUR.

The move also highlights that there could be a large spill-over effect to other European central banks, not least the Scandinavian ones, due to potential QE by the ECB. It cannot be ruled out that some will even start to question the sustainability of a peg to the EUR, but we do not expect Denmark’s EUR peg to be questioned.

ECB expected to deliver strong QE programme

We expect the ECB to deliver relatively aggressive QE in connection with next week’s ECB meeting (see Euro area outlook for 2015: ECB will buy government bonds, 15 January 2015). Specifically, we expect the ECB to announce a bond purchase programme of EUR750bn running until September 2016. In our view, this is more than expected not least because the implication is that the monthly purchases will be large and, in our view, the pace of purchases will be more important than the size of the programme.