Swiss National Bank Retains Aggressively Loose Monetary Stance

June 18, 2009

Following a quarterly policy review, SNB officials agreed to continue the easing steps announced in March.

  • The 3-month Libor target range stays at 0-0.75% with a point guideline of 0.25%.
  • Intervention will be continued to prevent further appreciation of the Swiss franc against the euro.
  • Quantitative policy measures are being done to limit capital market risk premia.

The result of today’s meeting was consistent with market expectations and followed substantial easing last autumn and in March.  In four previous moves over the space of two months, the target rate was cut by 25 basis points on October 8, 50 bps on November 6, 100 bps on November 20, and 50 bps on December 11.  After that drop from 2.75% to 0.50%, the Swiss rate target was halved three months later to its present level of 0.25% on March 12th.  At that point, officials also supplemented interest rate policy with quantitative easing and an exchange rate appreciation containment goal.

A statement released by authorities found these actions to be achieving their intended goals and conditions to be normalizing gradually.  However, downside risks to growth and financial market functionality remain “skewed to the downside” and “major.”  So implementation of any exit strategy now would be premature.  The projected path of inflation was revised upward due to firmer commodity prices than observed three months ago.  In 4Q09, the CPI is forecast at negative 0.28% rather than minus 0.43% as in March.  At mid-2010, such is expected to have rebounded to 0.5% rather than 0.19%.  But as late as 2Q11, CPI inflation is still merely at 0.17%, and the forecast inflation rate for 2011 as a whole of 0.3% is actually a tenth less than envisaged for 2010.  All this underscores the existence of medium-term deflationary risks and suggests the central bank rate will begin rising later rather than sooner.

Switzerland’s inventory adjustment lies mostly in the future, and domestic demand remains very weak.  GDP contracted 3.2% in annualized terms last quarter despite higher inventories.  Accordingly, the statement looks to more quarters of negative growth and a GDP drop this year of 2.5-3.0% with risk skewed downward.  Recovery prospects hinge on an improvement in global demand.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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