Switzerland keeps FX cap, trims inflation forecast

    The Swiss National Bank (SNB) maintained its cap on the Swiss franc's exchange rate at 1.20 per euros, saying the franc remains high and "the minimum exchange rate continues to be the right tool to avoid an undesirable tightening of monetary conditions in the event of renewed upward pressure on the Swiss franc."
    The SNB, which imposed a ceiling on the Swiss franc during the height of the sovereign debt crises in the euro area in September 2011, also confirmed that "if necessary, it is prepared to purchase foreign currency in unlimited quantities for this purpose and to take further measures as required."
    The central bank also maintained its target for three-month Libor of zero to 0.25 percent, its target since April 2009.
    Despite a higher-than-expected inflation rate in May, the SNB again cut its forecast due to the outlook for modest global economic growth and "unexpectedly low inflation in the euro area."
    For 2014 the SNB raised its inflation forecast to 0.1 percent from zero percent it forecast in March due to the rise in May inflation to 0.2 percent from zero percent in March and April.
    Switzerland has been experiencing deflation since late 2011, partly due to the strong Swiss franc, which tends to rise during periods of heightened geopolitical risk as investors seek safe haven.
    For 2015 and 2016 the SNB now forecasts 0.3 percent inflation and 0.9 percent, respectively, 0.1 percentage points down from its previous forecast in March, which was also down from its December forecast.
    The SNB's inflation forecast is based on a three-month Libor rate of zero percent for the next three years and an expectation that the Swiss franc will weaken during that time.
    "Consequently, there are no signs of any inflation risks in Switzerland in the foreseeable future," the SNB said.
    Economic growth in Switzerland picked up in the first quarter of the year, but production remains below capacity and the SNB forecast growth this year of around 2.0 percent, the same as it forecast in March.
    In the first quarter of this year, the Swiss Gross Domestic Product grew by 0.5 percent from the previous quarter for annual growth of 2.0 percent, up from 1.7 percent.

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