Unchanged Swiss Monetary Policy after Quarterly Review

June 19, 2014

Almost three years have passed since the current policy stance was established to ward off deflation.  On August 3, 2011, the Swiss National Bank sliced the target 3-month Libor interest rate range and point to 0.0-0.25% and “around zero,” respectively.  A month later, officials introduced an asymmetric exchange rate objective, capping Swiss franc strength against the euro at 1.2000 to be enforced by intervention and other means if required but offering no resistance to future franc depreciation.  The franc was called high at the time and projected by officials to decline eventually in response to market forces.  They are still waiting for that to happen.  Since the franc’s target was established, it has averaged 1.2193 francs per euro and fluctuated between 1.1996 and 1.2650.  It is presently at 1.2163.

A statement released after the June quarterly review of policy, Swiss officials reaffirmed their monetary policy settings, projected only moderate growth of 2.0% this year in the Swiss economy and revised marginally downward projected CPI inflation from mid-2015 onward.  The deflation scare has not lifted.  From a low of zero next quarter, on-year CPI inflation is forecast to rise by a mere 0.1 percentage point over the ensuing four quarters and by 0.2 percentage points thereafter to 1.4% in 1Q17.  Calendar year inflation will still be less than 1.0% in 2016 if officials are right in their forecast.  It’s become habitual in recent quarterly policy reviews for projected inflation to get revised downward, and the new reason to explain the latest tweak is “unexpectedly low inflation in the euro area.” The statement stresses the existence of mostly downside risks associated with the baseline growth forecast and talks about very elevated uncertainty:  “Since the major currency areas are in different phases of the monetary policy cycle, there is a danger of greater volatility in the financial and foreign exchange markets. Surveys of companies have shown that uncertainty about economic conditions has recently increased at home as well.”

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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