Swiss maintain rates, inflation outlook largely unchanged

    Switzerland's central bank left its expansionary monetary policy in place, including the deposit rate at minus 0.75 percent, repeating that it still considers the Swiss franc to be "significantly overvalued" and it will remain active in foreign exchange markets as needed.
    The Swiss National Bank (SNB), which shocked financial markets on Jan. 15 by abolishing its cap on the franc's exchange rate to the euro, said its latest forecast for inflation differed little from the September forecast with 2015 inflation seen averaging minus 1.1 percent compared with minus 1.2 percent.
    In November Switzerland's consumer price inflation was steady at minus 1.4 percent from October.
    For 2016 inflation is expected to rise slightly to minus 0.5 percent, unchanged from the previous forecast, while inflation in 2017 is seen at 0.3 percent, down from 0.4 percent due to a slight deterioration in the outlook for the global economy.
    The Swiss franc has been largely steady against the euro in recent months and was trading at 1.08 to the euro today, up 11 percent since the start of this year when the cap of 1.20 francs per euro was in place.
    But against the dollar, the Swiss franc has been more volatile, hitting 1.03 earlier this month compared with 0.86 just after the exchange rate peg was scrapped. Today it was trading at 0.98 to the dollar, up 3 percent on the year.

    The Swiss National Bank issued the following statement:

"The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. The target range for the three-month Libor remains at between –1.25% and –0.25%, and the interest rate on sight deposits with the SNB is unchanged at –0.75%. Despite depreciating somewhat in recent months, the Swiss franc is still significantly overvalued. The negative interest rate and the interest rate differential with other currencies make the Swiss franc less attractive, and continue to help weaken it. At the same time, the SNB will remain active in the foreign exchange market in order to influence the exchange rate situation, as necessary. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market are intended to ease pressure on the Swiss franc. The SNB’s monetary policy thus helps to stabilise price developments and support economic activity.

Overall, the new conditional inflation forecast differs little from that of September. It indicates slightly higher inflation in the short term, and that inflation had already bottomed out in the third quarter. Owing to a slight deterioration in the outlook for the global economy, medium-term inflation is somewhat lower than predicted in September. For the current year, inflation is forecast at –1.1%, a 0.1 percentage point rise on last quarter. For 2016, an inflation rate of –0.5% is expected, and for 2017, the forecast is now at 0.3% instead of 0.4%. The conditional inflation forecast is based on the assumption that the three-month Libor will remain at –0.75% over the entire forecast horizon.

Global economic growth in the third quarter was below expectations, mainly due to weaker manufacturing activity around the globe and sluggish world trade. In contrast to manufacturing, the services sector performed well in most countries due to robust domestic demand.

The SNB has revised its growth forecast for the global economy slightly downwards for the short term. Overall, its assessment of global economic prospects is cautiously optimistic. Nevertheless, there are significant risks. The structural change underway in China could continue to hold back global manufacturing and investment activity. Equally, structural weaknesses in Europe as well as current concerns about public safety could also weigh on economic developments.

The slower pace of global economic growth was also felt in Switzerland, with the first official GDP estimate indicating stagnation in the third quarter. Economic performance thus came in below expectations. A close examination of a broad range of indicators leads to a somewhat more positive assessment of the economy. Nevertheless, capacity utilisation remains unsatisfactory, and demand for labour muted.

For 2015, the SNB still anticipates real growth of just under 1% in Switzerland. The gradual improvement of the global economy is likely to further strengthen foreign demand for Swiss goods and services. Domestic demand also looks set to remain robust. For 2016, the SNB expects growth of approximately 1.5%.

The past few months have seen mortgage volumes and prices for owner-occupied residential real estate grow roughly in line with fundamentals. Imbalances on these markets have therefore remained largely unchanged. The SNB will continue to monitor developments on the mortgage and real estate markets closely. Accordingly, it will regularly reassess the need for an adjustment of the countercyclical capital buffer."

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