Swiss Quarterly Monetary Policy Statement

December 16, 2010

The Swiss National Bank left its three-month Libor rate target at 0.25% within a corridor of zero to 0.75%.  That’s been the target since March 2009 following reductions of 25 basis points in October 2008, 150 bps in two steps during November 2008, 50 bps in December 2008 and 25 bps in March 2009.  In ordinary times, Swiss monetary authorities review their policy just quarterly, which is less frequently than most central banks.

The latest monetary assessment 

  • Calls Swiss growth last quarter “robust” but notes that goods exports have stagnated.
  • Flags a likely sharp slowdown of Swiss growth in 2011 to 1.5% from 2.5% this year.
  • Identifies a lessening threat of future deflation in Switzerland but allows for the possible reemergence of such a danger and asserts that measures to ensure price stability would then be taken.
  • Revises slightly downward the projected path of CPI inflation if the central bank rate were to remain at 0.25%.
  • Reiterates that “the current expansionary monetary policy cannot be pursued for the entire forecast horizon without compromising long-term price stability.”
  • Adds the caveat that an environment of heightened uncertainty continues.
  • Acknowledges that authorities are reducing reserves acquired from intervention earlier this year and that in doing so have also reduced the euro component of Swiss reserve holdings.

The soaring Swiss franc continues to wreak havoc with Swiss monetary policy.  As a result of the sovereign debt difficulties in Euroland and Britain, the franc has reacquired the hedging role it played in the 1970s.  No currency in the early days of floating exchange rates performed better than the franc, and like then, franc appreciation was juxtaposed against an impressive advance of gold prices.  EUR/CHF has become one of the better barometers of the ebb and flow in the euro debt crisis.  That crisis will probably get worse in the next six month, so Swiss authorities are being sensible not to wave the all clear sign on deflation and to brace for a much tougher year growth-wise in 2011 than 2010.

The new profile of future CPI on-year inflation puts such at 0.3% in the current quarter, 0.15% in mid-2011, 0.63% in 4Q11, 0.91% in 2Q12 (versus a forecast of 1.08% released three months ago), 1.30% in 4Q12, 1.78% in 2Q13 (compared to 2.25% projected in the September assessment), and 2.14% in the third quarter of 2013.  These predictions are contingent on no change of the 0.25% interest rate level, but the assessment implies that tightening will almost assuredly need to begin sooner than 2013.  With forecast year-average inflation of 0.4% in 2011 and 1.0% in 2012, CPI inflation will have advanced just 0.9% per annum over the five years to 2012.

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



Comments are closed.