Swiss National Bank Quarterly Policy Review

June 17, 2010

The 0.25% target for 3-month Swiss Libor within a 0.0-0.75% range has been extended for another three months.  This decision was expected.  In response to the world and domestic recession, the SNB had cut the target five times by a total of 250 basis points between October 2008 and March 2009.  There were reductions of 25 bps each at the start and end of that campaign, plus two unscheduled moves in November — the first by 50 bps and the other by 100 bps two weeks later — and a fourth cut of 50 bps in December 2008.  After those expeditious operations, the rate setting has been unchanged for the past fifteen months.

2009 had been characterized by a deflation scare.  As late as December, monetary officials reaffirmed “a risk of deflation remains” even though economic growth had resumed and financial markets were recovering gradually.  Three months ago, a monetary policy assessment was released that warned, “should more external shocks occur, the danger of deflation cannot be entirely ruled out.”  Today’s newest assessment strikes a less alarmist tone: “the deflationary risk in Switzerland has largely disappeared,” although the report indicates that “all the measures necessary to ensure price stability” will be engaged if downside price risks, particularly “via an appreciation of the Swiss franc, lead to a renewed threat of deflation.”  They are mainly referring there to currency intervention.  Extensive use of this tool in the past enabled the trade-weighted franc to strengthen only slightly since March.

The baseline growth forecast for Switzerland was raised again to about 2.0% in 2010, which is up from 1.5% projected three months ago and 0.5-1.0% penciled in at the end of 2009.  The latest assessment includes extensive discussion of the central bank’s balance sheet, which as in many other countries has been bloated by an extraordinarily expansionary credit policy.  Officials assert that “in the long run, a large part of the liquidity that has been created is excess liquidity” and conclude confidently that “the SNB has the necessary instruments at its disposal to withdraw this liquidity.”

The new projected inflation path under unchanged interest rates is not very different from the one projected three months ago.  The on-year rise of the CPI bottoms in the final quarter of 2010 at 0.71% versus 0.52% indicated last March, then creeps upward to 1.33% by the final quarter of 2011 (same level as in the March 2010 forecast).  Inflation thereafter accelerates to 2.76% by 4Q12 (compared to 2.75% seen previously) and 3.07% in the first quarter of 2013.  The emergence eventually of above-target inflation is corroborated by the profile of money growth, wherein M2 and M3 rose 10.2% and 7.1% in the year to May 2010.  Credit growth has picked up to 4.1% in April from 2.7% last September.

While short-term price stability is “guaranteed,” longer-term stability will require a normalization of policy.  The franc rose across the board this morning on the possibility that this process may begin as soon as September and the inference of greater tolerance for exchange rate appreciation.  From March 2009 to December 2010, the central bank employed a full-court press to defend the 1.50 per euro level.  Including today’s move, it has advanced since mid-December by 9% beyond that point.  The Swissy cross-rate is also 22.5% above its low of 1.6825 per euro in October 2007.  With a budget gap of marginally less than 1.5% of GDP, Switzerland does not share Euroland’s fiscal problems.  The franc is well-placed to extend its gains against the euro.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.