Pound to Swiss Franc (GBP/CHF) Exchange Rate Climbs Despite UK Inflation Fall

January 13, 2015 - Written by Toni Johnson

STORY LINK Pound to Swiss Franc (GBP/CHF) Exchange Rate Climbs Despite UK Inflation Fall

Pound Sterling to Swiss Franc Exchange Rate Sess Uptrend Despite UK Inflation Fall, SNB Says Cap Needs to Remain

The Pound managed to record gains against the Swiss Franc on Tuesday despite a fall in UK inflation. UK consumer prices dropped from 1.0% to 0.5%, the lowest level 15 years. The fall in inflation has seen traders readjust their bets for a rate hike from the Bank of England in 2015. Economic expert Rain Newton Smith stated: ‘With falling inflation rates and subdued earnings growth, we do not see the first rate rise in interest rates happening any time soon. Even by the end of 2016, the stance of monetary policy is likely to remain loose, providing a bit more breathing space for the UK’s recovery.’

However, since the initial Pound losses sustained immediately after the data release, investors and economists have looked at the figures differently. The recent decline in oil and energy prices accounts for the majority of the drop in inflation, as the core measure grew from 1.2% to 1.3%. Therefore, the weakness in inflation can be largely accredited to volatile commodity prices, not a downfall in the UK economic recovery. However, Bank of England Governor Mark Carney recently stated in a press conference that if inflation fell below 1.0% he would be forced to write a letter to Chancellor George Osborne explaining why. Carney had stated: ‘Strictly speaking, I do not expect to write a letter, it’s just the balance of probabilities.’

Meanwhile, former Swiss National Bank advisor Ernst Baltensperger has recommended that the central bank remove the Swiss Franc’s peg to the Euro, instead replacing it with a tie to a currency basket—allowing the SNB more flexibility. In December the SNB was forced to introduce negative interest rates to defend the 1.20 cap with the Euro. However, the central bank rebuffed such an idea when vice-chairman Jean Pierre Danthine stated that the cap will be the main monetary policy tool. Danthine stated: ‘We took stock of the situation less than a month ago, we looked again at all the parameters and we are convinced that the minimum exchange rate must remain the cornerstone of our monetary policy.’

However, if the ECB begins to repurchase debt, the Swiss National Bank may need to make adjustments. Danthine continued: ‘We would obviously be affected by a policy of that kind. That being so, it is already very much factored in by the market. The US experience shows that the anticipation of moves like that absorbs a good deal of their effect.’

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