SNB Keeps Rates Steady as Inflation Edges Up, Weak Franc Fuels Carry Trade
The Swiss National Bank (SNB) has decided to keep its key interest rate steady at 0%, citing a very low domestic inflation rate of just 0.8%. SNB chairman Martin Schlegel stated that inflation remains within the bank's definition of price stability, which is between 0% and 2%. The Swiss inflation rate has edged up due to stronger goods prices linked to higher oil costs.
Despite this increase in inflation, the SNB has not changed its policy rate. However, the weak Swiss franc has fueled carry trade appeal, making it less attractive when interest-rate differentials versus the euro and US dollar are high. Schlegel reiterated the bank's willingness to intervene in the foreign-exchange market if needed.
The current wide differential between the SNB's 0% rate and higher rates elsewhere makes the Swiss franc an 'incredibly cheap funding currency for global carry trades'. Derivative traders can exploit this gap by using forward contracts to short the Franc against higher-yielding currencies. The USD/CHF pair is currently trading around 0.8265, providing plenty of room for the dollar to climb as investors chase yield differences.