The Swiss National Bank (SNB) is the central bank of Switzerland. Their mission is to promote and maintain monetary and financial stability. Traders need to stay up to date with the latest changes in SNB monetary policy as they can have a major impact on the Swiss Franc (CHF).
What is SNB?
The Swiss National Bank was founded in 1907. It is responsible for Switzerland’s monetary policy and issues Swiss franc banknotes. As of 2015, the Swiss National Bank is privately owned, with most of its shares held by the Swiss cantons. Like other central banks, the SNB uses a variety of monetary policy tools to achieve price stability and take into account economic developments.
The most important factor for traders is monetary policy, which we will explain in depth in this article. Other factors, such as central bank independence, are also important but are more common in emerging market economies.
The main economic task of the Swiss National Bank
According to the Swiss National Bank, their main goals are:
- Price stability – is the stability of exchange rates and/or inflation
- Economic development – is the focus of economic growth and stability
Price stability
Monetary policy is extremely important for the entire economy. It prevents runaway inflation and tries to keep inflation expectations in check so that the economy can grow at a steady pace. To maintain price stability, the Swiss National Bank and its Monetary Policy Committee (MPC) have set an inflation target of less than 2% for the CPI each year.
If inflation exceeds its 2% target, the Swiss National Bank may have to raise interest rates. Raising interest rates could cause the Swiss Franc (CHF) to appreciate as investors move capital into higher-yielding currencies. It could also have a negative impact on the stock market, as businesses will have to pay higher interest rates to borrow and stock valuations will be discounted at higher interest rates. Monetary policy data can be found on our economic calendar.
However, the Swiss National Bank does not always raise interest rates if inflation is above its target. In some cases, such as when GDP growth remains low or negative, the Swiss National Bank may keep interest rates low to stimulate the economy. It is important to understand that the Swiss National Bank will seek a balance between healthy inflation and economic growth.
Economic development
Economic developments are closely linked to monetary policy. Changes in the economic outlook often prompt central banks to update their monetary policy plans to stabilize the economy.
How SNB Interest Rates Affect the SWISS FRANC (CHF)
The Swiss National Bank can influence the value of the Swiss Franc through changes in interest rate expectations. Traders should understand that currencies appreciate/depreciate when interest rate expectations rise/fall, not just from increases in nominal interest rates.
Like most central banks, the Swiss National Bank uses a variety of monetary policy tools to control interest rates. Foreign exchange markets often price in current interest rate expectations, and changes in these expectations can cause the Swiss franc to depreciate or appreciate. The Swiss National Bank can do this by issuing forward guidance (telling the market) that it expects to raise or lower (or cut) interest rates further in the future.
The general rule of thumb for how interest rates affect the Swiss Franc and the stock market is given below:
- Expectations of higher interest rates strengthen the Swiss Franc and negatively impact stock values.
- Expectations of lower interest rates reduce the strength of the Swiss Franc and have a positive impact on stock values.
The impact of interest rates on the economy
The Swiss National Bank lowers interest rates when they try to stimulate the economy (GDP) and raises interest rates when they try to curb inflation due to the economy operating above potential (overheating).
Lower interest rates stimulate the economy in a number of ways:
Businesses can borrow money and invest in projects that will earn more than the risk-free rate of return. When interest rates are lower, the stock market is discounted at a lower rate, leading to an increase in stock market value, which causes a wealth effect. People invest their money in the economy (stocks and other assets) because they can earn more on these assets than they would at the current low interest rates.
How to trade SNB interest rate decisions
The table below shows possible scenarios when interest rate expectations change, traders can use this information to forecast whether a currency is likely to increase or decrease in value and how to trade it.
| MARKET EXPECTATIONS | ACTUAL RESULTS | RESULTING FX IMPACT |
|---|---|---|
| Rate Hike | Rate Hold | Depreciation of currency |
| Rate Cut | Rate Hold | Appreciation of currency |
| Rate Hold | Rate Hike | Appreciation of currency |
| Rate Hold | Rate Cut | Depreciation of currency |
Things to note about SNB and forex trading
- The Swiss National Bank is the foundation for the value of the Swiss Franc.
- The Swiss Franc will rise or fall depending on changes in interest rate expectations, not on actual changes.
- Quantitative easing has a similar effect to changes in interest rates. Changes in expectations of quantitative easing will affect the Swiss Franc.
- Rising inflation does not mean the Swiss National Bank will raise interest rates, it depends on the balance between economic growth and inflation.
