No Changes in Short-Term Swiss Monetary Policy, But….

September 17, 2009

Swiss officials released a balanced quarterly Monetary Policy Assessment, opting for a cautious approach that 1) holds but does not increase the current expansionary monetary policy stance but also serves notice that this stance “cannot be maintained for the next three years” without compromising long-term price stability.

The point and range targets on three-month Swiss Libor since March 12 were retained as expected.  The central bank will continue buying Swiss franc bonds when necessary to hold down long-term rates but is not stepping up that policy. Intervention to stabilize the franc’s euro cross rate will be continued.  As a result of this policy since March, the franc is now stable in trade-weighted terms and against the euro.  Prior to the currency stabilization policy and the implementation of some quantitative easing, Swiss monetary authorities cut their target interest rates six times between September 2008 and March 2009 by 250 basis points from 2.75% to 0.25%.

Today’s statement announces that the risk of deflation has abated somewhat but not entirely disappeared.  Officials raised their projected 2009 GDP growth estimate by a full percentage point to a range of minus 1.5% to minus 2.0%.  New credit support measures are not needed, and no credit crunch presently exists.  Mortgage lending is up 4.6% on year, central bank money has more than doubled, and M3 is advancing more rapidly.

Newly published CPI inflation forecasts remain negative until the end of this year but have been revised to show a marginally higher and positive path through the first quarter of 2011.  From 2Q11, the new path for inflation deviates from the old trajectory more widely, climbing from 0.49% on year in 2011 to 1.46% by the final quarter of 2011, and it accelerates additionally to 1.87% in 1Q12 and 2.28% in 2Q12.  Inflation’s climb above the target range in 2012 is what monetary officials expect if the Libor target remains at 0.25%, so a need to tighten well before then now exists.  In the previous quarterly statement, inflation only climbed as high as 0.65% by the first quarter of 2012, but officials foresee the shortfall of actual output from potential output now closing more rapidly than before.

The statement is not specific about how soon rates may be raised but rules out moving now because of two continuing growth risks.  The first is that global growth proves unsustainable after present temporarily positive impulses fade away.  The second risk is the possibility of a setback in the recuperation of the global financial industry.

This more upbeat assessment of growth, price and monetary policy prospects may tempt markets to bid the franc more strongly, but officials will counter such with more forceful euro purchases and very intervention if necessary.  A near-term rise of the franc through 1.50 per euro seems unlikely.

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



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