No Policy Changes after Swiss National Bank Quarterly Review

December 13, 2012

Swiss monetary officials didn’t change either their interest rate target range nor the maximum franc/euro cross rate level that they stand ready to defend with “utmost determination,” that is unlimited intervention.  Both the interest rate and exchange rate settings are intended to counter deflation and restore eventual low, but positive, inflation.  Aggressive interest rate reductions four years ago didn’t prevent the franc from soaring or inflation from swinging below zero.  a target of 2.75 for three-month Swiss Libor within a 2.25-3.25% range had been in place during the summer of 2008.  In five steps, the point Libor target was slashed to 0.25% by March 2009.  When that proved insufficient to forestall deflation, the range was cut in August 2011 to 0-0.25% with a point objective of zero.  On September 6, 2011, a ceiling of 1.2000 francs per euro was unilaterally imposed.  There had been some speculation that this month’s quarterly review might result in a weaker line in the sign for the franc of 1.2300 or 1.25, but that wasn’t done.

A statement released by officials today revealed that the disinflationary impact of prior exchange rate appreciation had been under-estimated, but only minor changes were made to a projected future path of inflation with unchanged monetary policy settings.  The path was revised downward through 3Q14, mostly by 0.1 of a percentage point, and thereafter the same as indicated in the prior forecast released three months ago.  On-year CPI inflation of negative 0.2% is penciled in for the current quarter and first half of 2013.  Such then is projected to crawl upward to 0.4% in 3Q14 and to be a shade under 1% at 0.9% in the year to 3Q15.  In calendar year comparisons, inflation remains negative next year at minus 0.1% and rises to just 0.4% in 2014 and an average of 0.8% over the first three-fourths of 2015.

Real GDP in 2013 is expected to expand between 1.0% and 1.5%, and this baseline projection comes with the caveat of “considerable downside risks.”  Although officials did not alter the franc ceiling rate that they are prepared to defend, the forecast over the medium term assumes that the exchange rate eventually eases further.  Since the conditional inflation forecast “is almost identical to that of September,” however, the monetary authorities did not see a big need to modify the line in the sand that they are prepared to defend.  In recent months, actual intervention has declined substantially.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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