Switzerland Leaves Rates on Hold, Raises Inflation Forecasts

The Swiss National Bank left its deposit interest rate at a record low of -0.75 percent on December 14th 2017 as widely expected. Policymakers said the franc remains highly valued although the overvaluation continued to decrease. Also, inflation forecasts for both 2017 and 2018 were raised amid higher oil prices and the further weakening of the franc.

The target range for three-month libor was also kept between -1.25 percent and -0.25 percent. 

Excerpts from the SNB press release:

Since the last monetary policy assessment, the Swiss franc has weakened further against the euro and, more recently, has also depreciated against the US dollar. The overvaluation has thus continued to decrease, yet the franc remains highly valued. The depreciation of the Swiss franc reflects the fact that safe havens are currently less sought after. However, this development is still fragile. Therefore, despite the easing of the situation, the negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential. These measures keep the attractiveness of Swiss franc investments low and thus ease pressure on the currency. A renewed appreciation would still be a threat to price and economic developments.

The new conditional inflation forecast for the coming quarters is higher than it was in September. This is mainly due to increased oil prices and the further weakening of the Swiss franc. The longer-term inflation forecast is virtually unchanged. For the current year, it has risen marginally to 0.5%, from 0.4% in the previous quarter. For 2018, the SNB anticipates an inflation rate of 0.7%, compared to 0.4% last quarter. For 2019, it continues to expect inflation of 1.1%. The conditional inflation forecast is based on the assumption that the threemonth Libor remains at –0.75% over the entire forecast horizon.

The past few months have seen further improvements in the international environment. The global economy exhibited strong, broad-based growth in the third quarter. The SNB expects it to continue developing favourably in the quarters ahead. The growth forecasts for the euro area and the US have been revised upwards slightly compared to the previous baseline scenario. While the normalisation of monetary policy gradually continues in the US, monetary policy in the euro area and Japan remains highly expansionary. In Switzerland, GDP grew in the third quarter at an annualised 2.5%. Growth was primarily driven by manufacturing, which benefited from dynamic economic developments abroad and the weaker Swiss franc. In the wake of this development, capacity utilisation in the economy as a whole increased further. The unemployment rate declined again slightly through to November.

Given the supportive global environment and favourable monetary conditions, the recovery in the Swiss economy looks set to continue in the coming months. For 2018, the SNB expects GDP growth of around 2%, compared to 1% in the current year.

Switzerland Leaves Rates on Hold, Raises Inflation Forecasts

SNB | Joana Taborda | joana.taborda@tradingeconomics.com
12/14/2017 8:59:02 AM