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Is there hope for those who have a Swiss franc loan?

19 Sept 2018 17:03|Marcin Lipka

"Over the last few months, the franc has been clearly appreciating both on the global market and versus the zloty. However, the Swiss National Bank’s meeting on Thursday may bring a glimmer of hope for those who are repaying loans denominated in the franc. Why?" asks Marcin Lipka, Conotoxia Senior Analyst.

Currently, the Swiss economy is surprisingly strong. GDP increased by as much as 3.4% y/y in Q2 of this year. In addition, on Wednesday, the Swiss State Secretariat for Economic Affairs (SECO) raised the growth perspective to 2.9% for the whole of 2018, while in June SECO estimates were at the level of 2.4%. Is it possible for the Swiss National Bank (SNB) to suggest drastic intervention that would weaken the franc and bring relief to Swiss franc loan payers?

A tough nut to crack

Usually, when a country's economy strengthens and its growth remains above potential for a longer period of time (as is currently the case in Switzerland), the central bank begins to tighten its monetary policy. Most often it raises interest rates in order to cool down the economy a little and prevent overheating and the subsequent deep slowdown.

However, in the case of Switzerland, there are no increases. In addition, SNB continuously suggests the possibility of intervening to counteract the franc's strengthening. The whole announcement is also linked to the situation on the currency market, where SNB estimated in June that the franc is "highly valued".

The franc's "high valuation" is, however, a slightly less aggressive suggestion from SNB to revalue the Swiss currency than it was with the statements in 2016. At that time, the franc exchange rate was described by the monetary authorities as "strongly overvalued". Is there a chance of a return to a more aggressive weakening of the franc in the case of such a good economic situation in Switzerland?

Concerns about the global situation may trigger the SNB intervention

The increase in economic forecasts by SECO does not mean that there are only positive signals from Switzerland. Together with estimates of faster GDP growth, it has been stressed several times that the risks of development of the Helvetic economy exceed the "possibility of positive surprises".

The most serious problems include, in particular, the continuation of customs conflicts between the United States and its trading partners. SECO says that in the event of escalation of customs disputes, "Swiss trade can be severely affected and companies can reduce their investments". In addition, political uncertainty in Europe remains at an elevated level (Brexit, unclear Italian fiscal policy plans). Turbulence in the Old Continent may translate into increased fear in the markets and thus strengthen the perception of the franc being a safe haven currency.

It seems that this argument could make the SNB change its statement and suggest a greater urge to intervene in order to weaken the Swiss currency. In addition, since mid-May this year, the franc has strengthened to the euro by more than 5%. This may be a powerful reason to convince SNB to be more assertive about the re-evaluation of the franc. If this happens, on Thursday morning (20.09.) those repaying loans in the Swiss currency may experience a weakening of CHF by as much as 0.05 PLN.

19 Sept 2018 17:03|Marcin Lipka

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