New Worries at the Swiss National Bank about Deflation

September 15, 2011

At the regularly scheduled quarterly review of monetary policy, no further measures were unveiled, but Swiss central bank authorities tied the many actions announced since early August to a fresh threat of domestic deflation and recession caused by a “massively overvalued” franc and worsening prospects in Switzerland’s trading partners and global financial markets.

To recap the earlier steps,

  • The target range and point for three month Swiss Libor was cut August 3 to 0-0.25% and around zero.  At the same time, the objective size of sight deposits held with the central bank was increased to CHF 80 billion from CHF 30 billion.
  • The sight deposit target was raised to CHF 120 billion on August 10 and to CHF 200 billion on August 17.
  • The most dramatic step of all, a minimum pegged ceiling of CHF 1.20 per euro (versus a recent euro low of CHF 1.0075 on August 9) was announced on September 6, to be backed by a pledge of unlimited intervention to make that so.

Today’s new statement reaffirms all of the above and speaks of “utmost determination” to achieve the new objectives.  The threats to growth, which officials believe will halt at least temporarily in the second half of 2011, and the risk of deflation are each called “acute.”  It is the hope and stated expectation of officials that the franc retreats further from a level they still consider “high.” Global uncertainty is “exceptionally high” and the risks that financial markets face have “increased substantially.”

To underscore this isn’t just verbal hype, new CPI inflation forecasts were released for a horizon that now extends to mid-2014, and the path they trace is considerably lower than the one released after the June policy review.  On-year inflation is expected to average negative 0.4% instead of positive 1.0% over the first three quarters of 2012 and only return to zero in the final quarter of next year.  Two years from now, officials expect inflation to be just 0.5%, revised down from 1.8% predicted in the previous report.  And whereas inflation had previously been forecast to reach 2.6% by the first quarter of 2014, officials now predict a 0.9% pace then, followed by 1.0% in 2Q14.

The final piece of today’s statement is a promise to take further measures “if the economic outlook and deflationary risks so require.”  The parting thought expressed is that “there are downside risks for price stability should the Swiss franc not weaken further.”

The world community is not going to rebuke Swiss authorities or call these moves an example of competitive devaluation.  ECB President Trichet last week implicitly gave a stamp of approval to the new Swiss policies and goals.  For the time being, investors would be advised not to fight the serious Swiss guidelines. 

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

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