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UBS Outlook Switzerland: One year on
- The SNB is likely to leave negative interest rates unchanged this year. It would lower them further only if its interventions to keep EURCHF between 1.07 and 1.10 became unsustainable.
- Following economic growth of 1% last year, the Swiss economy is expected to expand 1.4% this year.
- Consumer prices will continue to drop. UBS projects overall deflation of 0.4%.
Zurich, 26 January 2016 – Since the EURCHF exchange rate floor was abandoned early last year, the negative interest rates introduced by the Swiss National Bank (SNB) have stabilized the currency pairing. EURCHF settled above parity and has risen since the middle of last year. But suspending the exchange rate floor slowed Swiss economic growth to about 1% last year. This year UBS economists expect growth to pick up slightly and reach 1.4%.
The SNB lately signalled several times that it would intervene in the FX market with substantial sums if the Swiss franc rose markedly. As long as EURCHF stays in the "comfort zone" of 1.07 to 1.10, it is unlikely to further lower interest rates, only doing so if its interventions failed to keep the exchange rate above the "pain threshold" of 1.05. The negative rates have already had unwanted side effects on the Swiss finance and pension system, and UBS thinks that the SNB will leave them at their current -0.75%, raising them as soon as circumstances permit.
Slight increase in exports this year
"Despite the weakening in the second half of 2015, the Swiss franc is likely to retain its high value in 2016, especially vis-à-vis the euro. We expect a merely hesitant increase in exports and economic growth of 1.4% in 2016," says Daniel Kalt, chief economist UBS Switzerland. Provided imports only grow slowly, net exports should contribute 0.2% to GDP this year, according to UBS projections. The profits of many exporters are hurt by lower export prices and, due to their depressed margins, these companies are likely to curb their investments in Switzerland.
Clearly, the strong franc is affecting the domestic economy. UBS economists expect investment in equipment to stagnate this year. The sluggish economic growth is likely to raise unemployment from 3.3% last year to 3.5% this year. The rise in real wages, caused by an expected 0.4% fall in consumer prices, will probably offset the negative effect of the higher unemployment on household income. UBS anticipates private consumption climbing by 1.4% this year. Despite the slight deflation, the risk of a deflation spiral appears to be low in Switzerland, as the rate mainly reflects the adjustment of the economy to sudden exchange rate dislocations and plummeting oil prices.
Little movement in interest and exchange rates in the next 12 months
UBS economists think the franc will be slightly stronger at the beginning of this year. The EURCHF exchange rate should remain at the lower end of the 1.05 to 1.10 range, but greater Eurozone economic growth and further interest rate hikes by the US Federal Reserve will most likely cause it to rise again toward 1.10 in the next 12 months. Owing to a similar movement of EURUSD, the USDCHF exchange rate is expected to remain close to parity.
The yields of Swiss bonds depend on international capital market developments, especially the interest rates of German bonds. Higher international rates and inflation expectations would moderately push up the yields of federal bonds and support the yields of Swiss bonds. UBS analysts expect 10-year Swiss government bond yields to inch into positive territory over the next 12 months.
UBS Switzerland AG
Daniel Kalt, Regional CIO Switzerland
Phone +41 44 234 25 60, firstname.lastname@example.org
Sibille Duss, UBS Chief Investment Office WM
Phone +41 44 235 69 54, email@example.com
Dominik Studer, UBS Chief Investment Office WM
Phone +41 44 234 81 74, firstname.lastname@example.org