Swiss Monetary Policy Preview

March 9, 2010

The Swiss National Bank holds fewer interest rate policy meetings than most central banks, just one per quarter when it also issues a fresh assessment with a projected inflation path going out 11 quarters.  The March review will be unveiled on Thursday.  The last rate cut occurred a year ago, when the Libor target corridor was compressed to 0-0.75%, and the point estimate was halved to 0.25%.  Four previous reductions from a peak target of 2.75% had been made: 25 basis points in October 2008, then two inter-meeting cuts of 50 bps and 100 bps in November, and 50 bps in December.  Quantitative easing via additional repo operations, purchases of franc-denominated bonds from private-sector borrowers, and intervention was also begun in March 2009.  To counter a perceived deflationary threat at that time, officials sold francs against the euro to depress the franc back past 1.50 per euro.

The policy stance was changed again in December 2009.  While conceding that a residual risk of deflation was still possible and thus keeping the interest rate element of their stance steady, monetary officials discontinued their buying of franc bonds and introduced a more flexible currency policy that would tolerate some appreciation.  From 1.5113 per euro at the time of the December meeting, the franc climbed to 1.4620 before eliciting intervention on February 5 and again on the 16th.  It remains close to that new euro cross, 3.3% firmer than three months ago against the common currency but nearly 5% softer against a rejuvenated dollar.  In December, meanwhile, new forecasts penciled in growth of only between 0.5% and 1.0% this year and projected CPI inflation not exceeding 1.0% until 3Q11 but then rising more briskly to 1.84% in the first quarter of 2012 and 2.55% by the third quarter that year.  Such an acceleration would violate the Bank’s obligation to preserve price stability, so investors were put on notice that “the expansionary monetary policy cannot be maintained indefinitely without compromising medium and long-term price stability.”  The Swiss watch ticking down the days to a rate hike had begun.

That moment will not come as soon as This week.   But June is possible and an increases by September is probable. The Swiss recovery has looked more solid over the past couple of months.  It turns out that real GDP last quarter advanced 3.0% at an annualized rate, twice as much as anticipated, and such lifted on-year growth into the black, +0.6%, from negative 1.3% in the third quarter.  Retail sales posted back-to-back increases of 4.7% in December and 4.4% in January.  The PMI-manufacturing index for Switzerland increased to 57.4 in February from 53.7 in December.  The UBS consumption indicator printed at 1.36 in January, up from 1.20 in December and 0.67 last September, and the Swiss index of leading economic indicators climbed from 1.62 in November to 1.87 in February, well above a cyclical low of minus 1.85 last May.  Unemployment is only 4.1%.  Three mitigating factors argue for a rate hike not yet and perhaps not as soon as midyear: 1) the franc’s gain against the euro, 2) Europe’s fiscal woes which have depressed the euro and seemingly moved the onset of tightening in Euroland out further, and 3) subdued Swiss inflation.  The CPI rose only 0.9% in the year to February, and producer prices in January were 1.3% lower than a year earlier.

In this era of policy transparency, a clue is likely to be dropped Thursday if officials are seriously contemplating a rate increase as early as June.  Because that is the next scheduled meeting, now is the time to begin the process for readying everyone for any change at that time.  It will be interesting, too, to see how high the Bank projects inflation at the end of 2012 on unchanged policy.  The figure could be near 3.0%, which would raise some eyebrows.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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