With its key policy rate back at zero, the SNB now faces a significant hurdle in their next steps as their options are rather limited. One thing that is clear is that the central bank is definitely in need of trying to pursue a weaker Swiss franc currency. However, BofA argues that there needs to be a major change if not the SNB is going to be just facing a losing battle.
BofA notes that markets are seeing the current zero rate as a floor for Swiss interest rates. That as negative rates are seen carrying more costs than benefits at this stage. As such, that will limit any major downside pressure on policy expectations towards the Swiss franc currency.
Besides that, other major central banks are also slowly converging to lower rates and that will see carry costs in holding the franc become less punishing. So, that adds another supportive factor for the currency so long as the SNB still hasn't dived into negative rates.
And BofA also argues that currency interventions historically have failed to correct or alter the appreciation path of the franc. And even with rates now back at zero, it has not reduced the overvaluation in the currency whatsoever.
All in all, the SNB looks to be waging a war that it can't win. So, what can they do?
BofA suggests that the SNB should look towards a more comprehensive overhaul of its policy approach. The firm says it would welcome a shift towards greater transparency in the SNB's decision-making, helping to improve the market understanding of its reaction. And that means even moving away from its vague and untimely quarterly approach at the moment.
Besides that, the firm also says that the SNB should try to transition towards a more explicit and symmetric FX framework. Adding that it could at least help to provide some options in the long-term for the central bank.
