Swiss National Bank Leaves Rate Target at 0.25% and Releases Dovish Statement

September 16, 2010

The Swiss franc fell as investors were wrong-footed by the new quarterly Monetary Policy Statement.  A forecast earlier this week by UBS flagging the risk of a surprise rate hike, which would have been the first tightening since September 2007, had received considerable attention and had lifted the franc through par to the dollar.  Not only did that possibility fail to occur, but the statement accompanying the decision of no rate change instead revived deflationary warnings.

The projected path of CPI inflation was lowered considerably from that indicated in June.  Inflation is expected to sink to zero in the first quarter of 2011 (1Q11), and officials would not rule out the chance of such turning slightly negative, albeit temporarily.  Inflation thereafter edges up to 0.15% in 2Q11 compared to 0.81% forecast three months ago.  From there, it creeps gently higher to 0.36% in 3Q, 0.59% in 4Q and just 0.84% in the first quarter of 2012, half as much as the 1.69% 1Q12 estimate given in June.  At end-2012, CPI inflation would be 1.60% versus 2.76% predicted before, and in the first quarter of 2013 such is still below 2% at a projected 1.89% versus the 3%+ projection of 3.07% made in June.  All of the new estimates are conditional upon the target interest rate for three-month Swiss Libor remaining at 0.25% within a 0-0.75% range.  If the central bank were to tighten as the UBS folks would have them do, the price path would be even lower, that is presumably below zero for a longer stretch of time.

In calendar year average terms, CPI inflation is now projected at 0.7% this year, 0.3% in 2011, and 1.2% in 2012, down from the previous forecasts of 0.9%, 1.0%, and 2.2%.

The causes of these substantial revisions are, first and foremost, the considerable appreciation of the Swiss franc since June but also somewhat lower assumptions about economic growth abroad and at home.  Whereas Swiss real GDP is likely to average 2.5% this year, which represents an upward revision, a marked slowdown is now anticipated for 2011.  Swiss monetary conditions are already somewhat less expansionary than they were in June.  The statement does not threaten a new round of inflation.  Heavy intervention to prevent a further rise of the franc earlier this year was not only unsuccessful but also highly unprofitable.

The present target range of 0-0.75% has been in place since March 2009, that is for the past 18 months, and it is the same range as that from March 2003 to June 2004 during a previous deflationary scare.  During the world recession, the key rate was cut from a peak of 2.75% by 25 basis points in October 2008, 50 bps on November 6, 2008, 100 bps on November 28, 2008, 50 bps in December 2008, and 25 bps in March 2009 to its present level of 0.25%.

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



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