Quarterly Swiss Monetary Policy Review: No Rate Change

June 16, 2011

As expected, Swiss National Bank policy-makers have retained a 0.0 – 0.75% target range for three-month Swiss LIBOR with a point estimate of 0.25%.  These have been the rate parameters since March 12, 2009 following cuts of 25 basis points in October 2008, 50 bps on November 6, 2008, 100 bps on November 20, 50 bps on December 11, and 25 bps in March 2009. 

The central bank targets CPI inflation at a ceiling of 2.0% and does not project a two-handle until the final quarter of 2013.  Inflation this quarter is just 0.5%.  Because of higher oil prices and import prices more generally, projected inflation for the second half of 2011 and first quarter of next year have been bumped up from forecasts made three months ago, but the path shows deceleration in 4Q11 and 1Q12.  Because of recent unexpected appreciation in the franc despite low interest rates, the forecast for inflation from the second quarter of 2012 onward has been reduced.  The new forecast, which assumes no changes in the central bank rate and medium-term stability in the exchange rate, shows on-year inflation decelerating from 1.4% next quarter to 0.9% in 2Q12 and then a slow incline to 1.0% in 3Q12, 1.2% in 4Q12, 1.4% in 1Q13, 1.6% in 2Q13, 1.8% in 3Q13, 2.2% in 4Q13 and 2.6% in 1Q14. 

The driving force behind the ultra-low Swiss interest rate policy is mounting concern about the impact of the rising franc.  From a low in 2010 of 1.1730 per dollar, the franc has soared as much as 41% to a recent high of 0.8322.  The Swissy also has gained ground against the euro, reaching 1.2005.  That’s a gain of 25% since Swiss officials last year abandoned intervention to keep the franc no stronger than 1.50 relative to the euro.  The new peaks against both the dollar and euro represent record highs.  While the central bank review retains a projected Swiss growth rate in 2011 of 2.0%, risks are skewed to the downside as a result of the currency’s strength. 

Swiss monetary officials, as they always do, concluded with a warning that “the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising price stability in the long term.”  The new forecast indeed shows that if the key rate were to stay at 0.25%, inflation would exceed the 2.0% target ceiling by late 2013 and to rise at an accelerating pace from late 2013 onward.  Of course, they were warning the same thing back in 2009, and here in mid-2011, they still have not yet begun to normalize policy.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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