Summary
- Plunge likely caused by SNB bills and repos, economists say
- SNB plans to absorb excess liquidity to steer market rate
- Swiss inflation slows in September
Overnight deposits held by the Swiss National Bank dropped by 77.5 billion Swiss francs ($78.32 billion) last week, their largest ever weekly drop, the latest sign of the central bank’s shift to a more tight monetary policy.
Sight deposits – commercial bank money held by the SNB – plunged to 669.6 billion francs compared to 747.1 billion a week earlier, data on Monday showed.
It was the largest weekly fall since records began in 2011, and was probably the result of the SNB using reverse repos and bond sales to absorb excess liquidity in the market, economic said.
The SNB refused to comment on its market actions.
In September, it said it would resort to repos and bonds to steer the market interest rate – or Swiss Average Rate Overnight (SARON) – towards its policy rate, which it lifted to 0.5% from minus 0.25%.
After the interest rate change, the bank’s sight deposits rose to 28 times their minimum reserve level and will collect interest of 0.5%, while deposits above the level are not eligible for interest.
It is estimated the limit for all commercial bank reserves eligible for interest is 80% of their holdings, or 580 billion francs, before the SNB’s liquidity absorbing operation started.
Credit Suisse economist Maxime Botteron stated:
Buy Crypto Now“Most of the decline in sight deposits is likely due to liquidity absorbing operations, repos and SNB bills. Even banks that have not reached the threshold and therefore do not hold unremunerated reserves at the SNB may want to buy SNB Bills. The 3-month and 6-month bills that the SNB issued yield more than the policy rate at which the banks’ reserves are remunerated.”
Swiss National Bank Issued Bonds
Recent bonds issued by the SNB have had yields of 0.91% and 0.56%.
Botteron said it was also likely the SNB might have sold some of its foreign currency reserves, which would also decrease sight deposits, as the franc slumped slightly against the euro over the past few days.
SNB Chairman Thomas Jordan has said the central bank would think about selling foreign currencies if the franc languished, especially with the franc’s high value proving helpful in containing Swiss inflation.
Inflation dropped last month to 3.3% from 3.5% in the previous month, more good news for the SNB which has shifted from fighting the strong franc to trying to curb inflation. However, economists are cautious about reading too much into one month’s data and forecast more rate hikes in the coming months.
Elias Hafner, an FX strategist, said:
“One print does not mean a change in trend. We still expect inflation will rise further in Switzerland until January, when electricity prices are adjusted upward. Therefore, the SNB will further adjust its monetary policy and will further hike interest rates,” said Hafner, who predicts a 75 basis point rise in December.
($1 = 0.9895 Swiss francs)
