Brilliant. So, the SNB’s rate change is principally a function of the ECB’s rate change, absent other factors. And independently of that, ‘unwarranted’ CHF strengthening can act as a driver of rate cuts, at times outside of scheduled SNB meetings. Also, it seems to imply that Fed’s 25v50bps on Wednesday is not a key driver of what SNB would do a week later. Thank you Stefan!
One has to be careful interpreting these results. The SNB reacts ONLY to Swiss economic conditions. But these depend closely on economic conditions in the euro area and in the US economy.
One approach would be to find data on short-term forecasts of economic activity, employment, inflation etc for Switzerland, the euro area and the US. It would be difficult to construct a complete data set with such forecasts. But we do know that the ECB and the Fed carry out thorough analyses of economic conditions and that they cut rates when those conditions look "bad." So we use the ECB's and the Fed's interest rate changes to capture changes in the economic outlook for Switzerland -- that is statistics, not economics. (And the exchange rate to the euro matters on top of these changes.)
Empirically, it looks like 1/2 of the ECB's, and 1/4 of the Fed's, interest rates changes are transmitted to the outlook for Swiss interest rates. These effects are both statistically significant, but the US effect is much smaller. So US rates matter too, but much less than ECB's rates.
Very interesting analysis. It will be also interesting to see how market probabilities would change this coming Wednesday as the Fed chooses between 25 or 50bps. Basically, what is current market perception of the reaction function of the SNB to shift in the Fed fund rate (given that in one way or another there is going to be a surprise)?
I was thinking of the same. It gets even more complicated if you start thinking about what the Fed doing 50bp implies for the market pricing of the ECB cutting in October. The SNB may well be more interested in the latter outcome given that EURCHF is a soft intermediate target.
Brilliant. So, the SNB’s rate change is principally a function of the ECB’s rate change, absent other factors. And independently of that, ‘unwarranted’ CHF strengthening can act as a driver of rate cuts, at times outside of scheduled SNB meetings. Also, it seems to imply that Fed’s 25v50bps on Wednesday is not a key driver of what SNB would do a week later. Thank you Stefan!
One has to be careful interpreting these results. The SNB reacts ONLY to Swiss economic conditions. But these depend closely on economic conditions in the euro area and in the US economy.
One approach would be to find data on short-term forecasts of economic activity, employment, inflation etc for Switzerland, the euro area and the US. It would be difficult to construct a complete data set with such forecasts. But we do know that the ECB and the Fed carry out thorough analyses of economic conditions and that they cut rates when those conditions look "bad." So we use the ECB's and the Fed's interest rate changes to capture changes in the economic outlook for Switzerland -- that is statistics, not economics. (And the exchange rate to the euro matters on top of these changes.)
Empirically, it looks like 1/2 of the ECB's, and 1/4 of the Fed's, interest rates changes are transmitted to the outlook for Swiss interest rates. These effects are both statistically significant, but the US effect is much smaller. So US rates matter too, but much less than ECB's rates.
Thank you for clarifying, Stefan.
Very interesting analysis. It will be also interesting to see how market probabilities would change this coming Wednesday as the Fed chooses between 25 or 50bps. Basically, what is current market perception of the reaction function of the SNB to shift in the Fed fund rate (given that in one way or another there is going to be a surprise)?
I was thinking of the same. It gets even more complicated if you start thinking about what the Fed doing 50bp implies for the market pricing of the ECB cutting in October. The SNB may well be more interested in the latter outcome given that EURCHF is a soft intermediate target.