SNB ahead of interest rate decision: calm in the centre of a busy central bank week

This week is dominated globally by monetary policy. Several of the world's most important central banks—including the US Federal Reserve (the Fed), the European Central Bank (ECB), and the Bank of England—will reassess the situation and decide on their interest rate policies. Overall, around a dozen central banks are setting their policies; their currencies account for about 90% of global foreign exchange trading. Accordingly, forex markets traditionally react nervously to such clustered events.

Key rate likely to remain at 0%

In this environment, the Swiss National Bank's (SNB) monetary policy assessment is due on 19 March. From today's perspective, the most likely scenario is clear: the SNB will probably leave its key interest rate at 0%. Inflation in Switzerland remains moderate, while the franc has once again proven itself as a classic safe-haven currency. Especially in geopolitically uncertain times—currently intensified by tensions in the Middle East and rising energy prices—international investors are increasingly seeking safety in the franc. While a strong franc dampens imported inflation, it burdens the export industry and tourism. For the SNB, this creates the familiar tension between price stability and exchange rates.

Negative interest rates: very low probability, but not ruled out

Market discussions mention a possible return to negative interest rates, but the probability is currently seen as very low. Interest rate traders are only pricing in a small chance that the SNB might cut the key rate below zero again. Negative rates remain part of the monetary policy toolkit. In theory, they could make the franc less attractive and slow capital inflows. At the same time, however, they would be politically sensitive and put pressure on banks, savers, and parts of the real estate market once more. Therefore, a step back into negative territory would rather be an emergency tool, for example in the event of strong deflationary pressure or a massive franc appreciation. In the short term, this scenario is hardly the base case. Should the franc appreciate sharply, the SNB is more likely to resort to a tool it has historically used repeatedly: interventions in the foreign exchange market. Experiences from 2011 and 2015 have shown that the central bank is prepared to intervene decisively if it sees price stability or economic stability at risk. This factor still commands a certain respect among forex traders today.

What investors should watch now

From an investor's perspective, the interest rate decision itself may be less crucial than the tone of the SNB's communication. Indications regarding the assessment of the franc, inflation, or possible interventions can move forex markets more than an unchanged key rate. For investors, this means three main things above all:

• The franc remains a stability anchor, but its strength can reduce returns from foreign investments in CHF.
• The interest rate environment remains very low for the time being, making classic savings products even less attractive.
• Currency movements are becoming more important, especially for globally invested portfolios.

Or put differently: for most investors, the SNB on Thursday will likely deliver no interest rate surprise, but it will once again remind us that in a world of geopolitical tensions and active central banks, the exchange rate is often the real market mover.