The Swiss National Bank (SNB) maintained its expansionary monetary policy stance and said it remains “cautiously optimistic” about the outlook for the Swiss economy while the global economy is expected to continue to improve, with industrial activity and trade picking up.
The SNB left its benchmark target range for 3-month Libor rates at minus 1.25 – 0.25 percent along with a negative 0.75 percent rate on sight deposits at the central bank.
The rates have remained on hold since the SNB stunned foreign exchange markets in January 2015 by scrapping an upper limit on the exchange rate of the Swiss franc against the euro.
After the 1.20 cap on the franc against the euro was scrapped, the franc immediately soared but since then it has remained relatively steady. Today the franc was trading at 1.069 to the euro, up 0.4 percent since the start of this year.
The SNB confirmed that it still considers the franc to be “significantly overvalued” and will remain active in the foreign exchange markets when needed.
“The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing pressure on the currency,” the SBN said.
Updating its forecasts, the SNB raised its outlook for inflation in coming quarters due to higher oil prices but in the longer term inflation is expected to be slightly lower than forecast in December.
For 2017 the SNB now expects inflation to average 0.3 percent, up from 0.1 percent previously forecast, while inflation in 2018 is seen at 0.4 percent, down from 0.5 percent.
For 2019 inflation is seen at 1.1 percent with the forecast assuming an unchanged 3-month Libor rate of minus 0.75 percent.
In February Switzerland’s headline inflation rate rose to 0.6 percent from 0.3 percent in January for the highest rate since June 2011 and the third consecutive month of zero or positive inflation.
Although economic growth in the fourth quarter was lower than expected, the SNB said data still point to continued moderate recovery with growth of roughly 1.5 percent for this year.
In the fourth quarter of last year Switzerland’s Gross Domestic Product grew by only 0.1 percent from the third quarter for annual growth of 0.6 percent, down from 1.4 percent in the third quarter.
“Nonetheless, the forecast for Switzerland, too, is marked by considerable uncertainty emanating from international risks,” the SNB said, pointing to the future course of U.S. economic policy, the upcoming elections in Europe and the exit negotiations between the UK and EU.
The Swiss National Bank issued the following statement:
The SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration. The SNB’s expansionary monetary policy is aimed at stabilising price developments and supporting economic activity. The Swiss franc is still significantly overvalued. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive, thereby easing pressure on the currency.
Compared to December, the new conditional inflation forecast is slightly higher for the next few quarters. Increased oil prices in particular contribute to the rise in inflation in the short term. Over the longer term, however, the conditional inflation forecast is marginally lower. The inflation forecast for 2017 has risen to 0.3%, compared to 0.1% in the previous quarter. For 2018, the SNB anticipates inflation of 0.4%, compared to 0.5% in the previous quarter. The forecast for 2019 is 1.1%. The conditional inflation forecast is based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.
The global economy expanded in line with expectations in the fourth quarter. GDP growth was once again robust in the US, where the labour market has returned to full employment and inflation is approaching the Federal Reserve’s target. Against this backdrop, the Federal Reserve decided on 15 March to raise its key interest rate by a further 25 basis points. The other major economic areas likewise developed favourably in the fourth quarter. The euro area, Japan and China all reported encouraging growth rates, and economic growth in the UK was once again surprisingly strong.
In Switzerland, fourth-quarter GDP growth was lower than expected. According to an initial quarterly estimate, GDP grew – as in the third quarter – at an annualised rate of just 0.3%. However, a more extensive analysis of the available economic indicators points to an ongoing moderate recovery in the final months of the year; developments on the labour market support this view. Although the seasonally adjusted unemployment rate remained stable, the number of people out of work declined slightly from August onwards. Discussions with company representatives conducted by the SNB’s delegates for regional economic relations also suggest a moderate improvement of the economic situation.
Given favourable economic developments internationally, the outlook for Switzerland’s economy is cautiously optimistic. Overall, the SNB continues to expect GDP growth of roughly 1.5% for 2017. Nonetheless, the forecast for Switzerland, too, is marked by considerable uncertainty emanating from international risks.
Growth on the mortgage and real estate markets remained fairly constant at a relatively low level in the fourth quarter of 2016. At the same time, the slowdown in price momentum in the residential property market continued. Imbalances on the mortgage and real estate markets nevertheless persist. The SNB will continue to monitor developments on these markets closely, and will regularly reassess the need for an adjustment of the countercyclical capital buffer. “
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