Swiss National Bank Preview

December 9, 2009

I expect no meaningful changes in the very accommodative stance, but markets will be reminded that the policy is temporary only.

A quarterly Monetary Policy Statement outlining actions for the next three months and new central bank forecasts will be released Thursday.  Swiss National Bank policymakers forcefully relaxed monetary conditions last March, cutting their target range for the three-month Libor to 0-0.75%, the point target to an effective floor of 0.25%, and subordinating interest rate policy to foreign exchange policy with the aim of depressing the franc’s euro cross past the 1.50 threshold.  Over the ensuing nine months, intervention sales of francs have been undertaken periodically and successfully to keep the euro above 1.50 francs, including within the past fortnight.

The Swiss rate target was reduced hurriedly from a high of 2.75% at the beginning of October 2008 to 0.25% just five months later.  Such had been previously at the 2.75% peak for 13 months until the Swiss joined several other central banks in a Fed-led coordinated reduction on October 8, 2008.

The last statement from September 2009 conveyed different messages for the short-term and long-term, and tomorrow’s report will likely do much the same.  The September assessment acknowledged financial and economic improvement but would not rule out renewed deterioration even though the drop in Swiss growth had not been as large as officials anticipated.  A new projected CPI inflation path anticipated a jump in the on-year change to 0.84% in 1Q10 but then had such tailing back to 0.43% by the end of next year.  Inflation does not exceed 0.5% sustainably until 2Q11 and only exceeds 1.0% in 3Q12.  But unless policy is tightened beforehand, CPI inflation quickly accelerates to 1.87% by the first quarter of 2012 and an unacceptably high 2.28% in 2Q12.  Swiss officials take a very long view of inflation because they believe that shifts in interest rates do not fully impact until some two years later.  So if inflation by 2Q12 would be too high, the time to start doing something to prevent that would be mid-2010 if not somewhat sooner.

In the central bank’s own words last September, “expansionary monetary policy cannot be maintained indefinitely without compromising medium and long-term price stability. ….However, an immediate correction in monetary policy would be precipitate since the inflation outlook is associated with major downside risks.”  I will comb tomorrow’s report to see how diminished officials feel those risks have become and how their expected inflation glide path may have changed since September.  It will be interesting, too, to see what is said about the franc, which surely would sail past the 1.50 per euro level if the central bank were to step to the sidelines and not intervene to stop that.  Switzerland has a huge current account surplus and a comparatively small budget deficit to go along with a long history of price stability.  Even with a more suspect appeal as a haven to shelter wealth from taxing authorities, the franc remains a lure when the dollar’s long-term strength is getting scrutinized.

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



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