Swiss National Bank
June 18, 2015
As a perennial safe haven, the Swiss economy continues to grapple with the fallout of an overvalued currency related to global uncertainty including the five-year-long Greek debt crisis. Swiss monetary officials have resorted to negative interest rates and for several years imposed a cap with intervention on the Swiss franc’s euro cross rate. When that cap was removed in mid-January of this year, SNB officials cut the target range for 3-month Swiss Libor to -1.25/10.25% from a prior target of -0.75/+0.25%. The sight deposit rate since then has been -0.75%. The franc spiked after the January change, and officials have continued to employ foreign exchange intervention but no longer on an automatic and unlimited basis to maintain a target. Swiss monetary policy is reviewed on a quarterly basis.
The consequences of Switzerland’s exchange rate shock continue to be deflation and low growth. Consumer prices fell 0.7% in 2012, 0.2% in 2013, and were flat in 2014, and inflation over the coming three years is projected to average -0.4% per year. GDP fell slightly last quarter and is expected to average somewhat less than 1% this year as a whole.
After today’s review, which is summarized in a released statement, the existing stance was reaffirmed. “Negative interest rates in Switzerland make holding investments in Swiss francs less attractive and will help to weaken the Swiss franc over time. Overall, the Swiss franc is significantly overvalued. The SNB takes account of the exchange rate situation, and its impact on inflation and economic developments, in formulating its monetary policy. It will therefore remain active in the foreign exchange market, as necessary, in order to influence monetary conditions.” The new projected path of on-year CPI inflation is only marginally modified from that made three months ago. Officials expect inflation of -1.2% this and next quarter and -0.5% over the coming four quarters to 2Q16. Zero inflation is not attained until the first quarter of 2017 and, as late at 1Q18, still remains below 1.0%.
The statement affirms that interest rates will not be raised during the entire forecasting time from through the opening quarter of 2018.
Copyright 2015, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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