According to the latest Swiss National Bank (SNB) Quarterly Bulletin, the Monetary Conditions Index (MCI), which combines the 3-month LIBOR rate and nominal export-weighted value of the Swiss franc tightening during October by around 0.5%, but there was a reversal of trends in November with a move back to unchanged conditions relative to the September policy meeting, primarily reflecting a stronger dollar. The US currency has strengthened further during December and overall conditions are likely to be slightly looser, which will lessen pressure on the National Bank to force the exchange rate weaker or loosen monetary policy.
Inflation trends will also continue to have an extremely important impact on National Bank policies. The National Bank’s SFSO core inflation index was at -0.3% for November, but the trimmed-mean measures registered a reading of 0.1%, the first positive reading since the first quarter of 2015, which will increase confidence that inflation is gradually edging higher.
Inflation expectations will play a crucial role in the medium term with an increase likely to be a crucial component in pushing the inflation rate slightly higher.
According to the latest ZEW survey, for the first time since May 2011 a majority of analysts expected inflation rates to rise over the next six months.
SNB talks with regional delegates have confirmed the impression that there has been a slight rise in short-term inflation expectations with an expected rate of zero from -0.2% the previous quarter.
There has also been an increase in the expected rate over a 3-5 year horizon to 0.8% from 0.5% previously.
The SNB will still be looking to prevent franc appreciation, but there is likely to be slightly less urgency over the situation, especially if the dollar strengthens further.