Fewer Fireworks from the Swiss National Bank as Interest Rate Target Not Changed

March 19, 2015

No central bank created a greater market surprise in the first quarter of 2015 than the Swiss National Bank, whose franc ceiling of 1.2000 per euro was abruptly discontinued on January 15, which hadn’t even been a scheduled policy review.  These are held quarterly.  Monetary policy had been subordinated to an exchange rate policy in September 2011.  To enforce the exchange rate objective, the Swiss central bank interest rate target had fallen to zero, and increasingly heavy currency market intervention became necessary late last year.  The franc’s cap was reaffirmed at the normal December policy review, but once quantitative easing by the ECB became inevitable, Swiss officials abandoned the franc target but at the same time also cut its interest rate goal to negative 0.75% from zero.  The range for 3-month Swiss Libor was put at -0.25% to -1.25%, and those parameters were maintained after today’s review.

The statement released today by Swiss monetary authorities reserves a role for currency intervention on a discretionary basis, calling the current franc level “significantly overvalued.” The statement also slashes forecasts of economic growth and inflation from those made in December.  GDP is now projected to rise just 1.0% this year, down from a forecast before of 2.0%.  The estimate for average CPI inflation this year was slashed a full percentage point to -1.1%, and that for 2016 was cut to -0.5% from +0.3%.  On-year deflation is projected to crest in the second half of this year at 1.2%, not reach zero until the first quarter of 2017, and thereafter creep upward to 0.2% in 2Q17, 0.5% in 3Q17 and 0.7% in the final quarter of 2017.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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