Stay-The-Course Message From the Swiss National Bank

September 18, 2008

Swiss monetary policy is reassessed four times each year, not eight as the Fed or Bank of Canada do and not every month as done by central banks in the U.K., Euroland and Australia.  Eight 25-basis points increases between December 2005 and September 2007 lifted the targeted 3-month Libor rate from 0.25% to 2.75%, and that is where the rate has stayed through all four subsequent quarterly reviews including today.  No hint of a near-term rate cut was signaled.

For the most part, the Swiss National Bank’s press release explains why officials did not raise rates despite unacceptably high inflation, a slightly higher path of projected inflation in 2009, a “relatively robust” Swiss economy, capacity usage above its historical norm, and normal domestic lending conditions despite the global crisis.  CPI inflation had previously been projected to peak at 2.9% in the present quarter, but now is forecast to peak at 2.0% in 2Q09 and thereafter tail off to 1.54% in 4Q09 and 1.27% by 4Q10.  However, officials cite more factors that could push inflation above that forecast (a new rise in energy costs, stronger growth than expected, or a weaker franc) than might cause inflation to drop more quickly (a marked economic slowdown caused by the global financial crisis).  The press release promises to watch all factors and concedes that uncertainty surrounding the outlook is high.  But in one final tip to orthodox price-stabilizing monetary policy, they use the V-for-vigilance word.  When the ECB was raising rates in 2006 and 1H07, including “vigilance” in the lexicon became a means of signaling that a rate increase at the next meeting would be highly probable.

Monetary officials in the developed economies continue to resist market calls for lower interest rates.  In this response, The SNB has plenty of company including the Fed, BOJ, ECB, Swedish Riksbank and even the Bank of England.



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