Quarterly Review of Swiss Central Bank Policy Leaves Stance Unchanged

September 17, 2015

The Swiss deflation problem was aggravated by renewed weakness in world oil prices.  Consumer prices fell 1.4% between August 2014 and August 2015, and economic growth in the first half of 2015 was virtually flat, with a a drop in the first quarter reversed by slightly positive growth in the spring.  With interest rates near zero, the centerpiece of monetary policy from September 2011 until a surprise announcement in mid-January of this year was an intervention-enforced cap on the franc’s euro cross at 1.2000.  When that policy ended on January 15, the targeted 3-month Libor rate was cut to a range of minus 1.25% to minus 0.25%, and the point target for sight deposits was lowered to negative 0.75% from zero.  Today’s statement from SNB officials reaffirms those setting and pledges to continue using intervention to counter market demand, much of which has been speculative:  “the SNB will remain active in the foreign exchange market as necessary, in order to take account of the impact of the exchange rate situation on inflation and economic developments. Overall, the Swiss franc is still significantly overvalued, despite a slight depreciation. The negative interest rates in Switzerland and the SNB’s willingness to intervene as required in the foreign exchange market make investments in Swiss francs less attractive; both of these factors serve to ease the pressure on the franc.”

When the currency ceiling was lifted, the franc shot up initially all the way to 0.8600.  It has averaged 1.060 so far in 2015 and is now trading around 1.096.

The quarterly review projects a lower inflation path through the third quarter of next year.  Inflation isn’t expected to move above zero until the first quarter of 2017, and even assuming that the franc declines and that a -0.75% sight deposit rate is maintained for the entire forecast horizon, consumer prices are seen rising just 1.1% between mid-2017 and mid-2018.  GDP is projected to rise 1% this year.

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



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