Swiss central bank continues to tighten policy

Last week overnight deposits at the Swiss National Bank (SNB) dropped by 77.5 billion Swiss francs ($78.32 billion). It might be a signal of the central bank changing its’ monetary policy into a more tightened one. 

Demand deposits have fallen a week earlier as well. The amount of money that is held at the Swiss National Bank by commercial banks fell from 747.1 billion to 669.6 billion francs.

According to economists, it was the most significant drop since 2011 when records began. One of the possible reasons for this fall is the SNB’s attempts to absorb excess liquidity in the market through bond sales and reverse repos usage.

In September representatives of SNB stated that the bank will resort to bonds and repos for steering the interest rate of the market. It aims at forwarding the Swiss Average Rate Overnight, or SARON, towards its policy rate that has been raised from minus 0.25% to 0.5%.

After a change in the interest rate, the bank's demand deposits were 28 times above the minimum reserve level and will receive an interest rate of 0.5%, while deposits above that level are not subject to interest charges.

It is estimated that the limit for all interest-bearing commercial bank reserves is 580 billion francs, or 80 percent of their assets before the SNB's liquidity absorption operation began.

Maxim Botteron, Credit Suisse economist, said that he suspected liquidity absorption operations, repos and SNB bills as a reason for decrease in demand deposits. 

Botteron said even banks that haven't achieved the threshold and therefore don't hold uncommitted reserves at the SNB may have a will to buy SNB bills. The 3-month and 6-month bills issued by the SNB bring in more than the discount rate.

Botteron claimed there is a possibility of SNB selling part of its foreign-currency reserves. It would also lead to a decline in demand deposits as the franc has depreciated slightly against the euro over the past few days.

Thomas Jordan, SNB President, said the central bank could consider selling foreign currency if the franc weakened, especially since the high value of the franc helps keep inflation in Switzerland in check.

Inflation fell to 3.3 percent in September from 3.5 percent in August. It is good for the SNB as it has switched from struggling with the strong franc to attempting to tame inflation.

Nevertheless, economists are wary of one month's data that is why they are likely to expect further rate hikes in the next few months.

Elias Hafner, a currency strategist, stated that a decrease does not really mean a trend reverse. A further inflation rise is expected in Switzerland until January.It is the time when electricity prices will adjust upward.

Hafner predicts a 75 basis point rate increase in December as he said the SNB would adjust its monetary policy further.