Swiss National Bank Keeps Monetary Policy Unchanged After Quarterly Review

March 17, 2011

SNB policymakers decided to retain a target range of zero to 0.75% on three-month LIBOR and a point target within that band of 0.25%.  Those parameters have defined Swiss monetary policy for the past two years since a cut in March 2009 of 25 basis points in the point objective culminated 250 basis points of easing administered in six steps over six months from a high of 2.75% prior to September 2008.  Ultra-low interest rates were complemented initially by Swiss franc intervention to keep the franc from getting stronger than 1.50 per euro, but that strategy was abandoned in December 2009 after proving very costly.  Meanwhile, from their review in September 2009, officials have consistently made the point, as the latest statement asserts, “the current expansionary monetary policy cannot be maintained over the entire forecast horizon without compromising price stability in the longer run.”

The newest analysis by authorities revises up the near-term but not medium-term trajectory for CPI inflation.  For now such is very low.  Average inflation assuming no change in short-term interest rates is projected to be 0.8% in 2011, up from a prediction of 0.4% made three months also.  By 2Q12, it’s at 1.0% and thereafter traces an unchanged on-year path of 1.1% in 3Q12, 1.3% in 4Q12, 1.5% in 1Q13, 1.8% in 2Q13, 2.1% in 3Q13 and 2.5% by the final quarter of 2013.  An important disinflationary force will be the franc’s appreciation against the euro, which today touched 1.2477, representing a gain of 20% beyond the 1.50 line in the sand maintained for most of 2009.  Exchange rate strength will also dampen economic growth.  Although the Swiss economy expanded faster last quarter than officials had anticipated, they are projecting only a 2.0% rise of GDP in calendar 2011.  Downside growth risks besides the franc’s strength include higher oil prices and Euroland’s sovereign debt crisis.  Unlike the FOMC statement earlier this week, Japan’s crisis is mentioned in the SNB communique as a potentially “new element of risk,” but officials call the situation “at this stage difficult to assess.”

Swiss authorities have long taken the view that the lag between a change in monetary policy and eventual effect on prices is very long, which is why they publish conditional forecasts for the coming eleven calendar quarters.  Generally, they prefer to think that policy has to anticipate conditions two years or more into the future.  There latest forecast shows inflation moving above 2.0% in 3Q13, suggesting that they ought to act by mid-2011 and no later than September 2011.  The ECB has signaled a possible rate hike next month.  Unless the Japanese crisis and other factors snowball into a wider global slowdown soon, the ECB refinancing rate will be higher by the next SNB policy review in June.  Swiss officials will either raise their target rate then or use the opportunity to prepare markets for a probable rate increase no later than September.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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