Swiss National Bank Turns Off Quantitative Measure

December 10, 2009

After releasing a similar assessment of the Swiss economy to it prior review in September, the Swiss National Bank left its target interest rate on three-month Libor unchanged but discontinued its purchases of Swiss franc-denominated bonds issued by private-sector borrowers, a measure that was introduced nine months ago. Monetary officials also reaffirmed their determination not to allow the franc to appreciate against the euro.  Using intervention when necessary, they have kept the euro above Chf 1.50 since this pledge was made last March.

The latest policy assessment projects growth of 0.5-1.0% in 2010 and forecasts an inflation path that is almost identical to the last one but, for the first time, with the third quarter of 2012 added.  CPI inflation is not expected to climb above 0.5% until 2Q11 and remains under 2.0% as late as 1Q12, but it then accelerates sharply to 2.2% in 2Q12 and 2.55% in 3Q12, assuming that monetary policy doesn’t get tightened.  That rise is unacceptable.

So one policy message, repeated from the last assessment, is that the present “expansionary monetary policy” will not be maintained for the next three years.  A second message, also representing continuity from what officials said in September, is that because the global economy remains “fragile” and financial markets could still deteriorate, Swiss deflation remains possible, though not probable, and that makes the onset of higher central bank rates inadvisable at this time.

The December assessment devotes considerable space to analyzing monetary conditions from a quantitative standpoint.  This became necessary after rates hit their lowest feasible level.  M3 growth had accelerated to an on-year increase of 7.7% by October, and the narrower money aggregates have also expanded strongly.  Mortgage lending has accelerated from 3.2% in the year to November 2008 to 5.1% by October 2009.  The latest SNB survey of bank lending “suggests that demand for loans has stabilized,” and officials on the whole conclude in the report that unlike many other economies, Switzerland has “no credit crunch.”

Bottom line: Once officials feel that downside inflation risks have been sufficiently reduced, they are prepped to begin raising interest rates.  I think this will occur before the Fed does the same.

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



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