Swiss hold rates, sees global growth driven by demand

    Switzerland's central bank left its key interest rates steady, along with its commitment to intervene in foreign exchange markets as needed, but voiced a surprisingly optimistic view about the global economy by saying international growth was mainly being driven by domestic demand with growth in China "robust" and the United States "on the cusp of full employment."
    The Swiss National Bank (SNB), which stunned foreign exchange markets in January 2015 by scrapping its upper limit on the exchange rate of the Swiss franc, added that "positive economic signals" had helped calm down financial markets from their volatile period at the start of the year and it expects moderate growth in the global economy to be sustained in coming months.
    However, the SNB also said next week's referendum in the United Kingdom about its membership in the European Union (EU) posed a "significant" risk for the global economy and could trigger another bout of uncertainty and turbulence.
    Due to the pickup in oil prices in recent months, the SNB revised upwards its inflation forecast for this year to an average of minus 0.4 percent from minus 0.8 percent forecast in March but the impact of this will evaporate after the first quarter of next year.
   For 2017 the SNB forecast 0.3 percent inflation, up from its previous forecast of 0.1 percent, while for 2018 inflation is seen unchanged at 0.9 percent.
    In May, Switzerland's inflation rate was unchanged at minus 0.4 percent from April.
    Switzerland's economy and exports were seen benefitting from a "gradual improvement in the international environment," helping stimulate corporate investment and the labour market.
   For 2016 the SNB confirmed that it expects Gross Domestic Product growth of 1-1.5 percent. Annual growth in the first quarter of this year rose to 0.7 percent from 0.3 percent in the fourth quarter of last year.
    In addition to scrapping its 1.20 Swiss franc limit against the euro in January last year, the SNB also cut its benchmark target for the 3-month rate to between minus 1.25 percent and minus 0.25 percent and the interest on banks' deposits to minus 75 percent. The SNB maintained these rates today.
    The SNB also confirmed its view that the "Swiss franc is still significantly overvalued," and its negative interest rates were intended to make franc investments less attractive.
    Since abolishing its cap on the Swiss franc against the euro the franc has been slowly firming though it has slipped back in the last week.
    The franc was trading at 0.92 to the euro today, down from 0.90 at the end of May and largely unchanged since the start of the year.

 
    The Swiss National Bank issued the following statement:

"The Swiss National Bank (SNB) is maintaining its expansionary monetary policy. Interest on sight deposits at the SNB is to remain at –0.75% and the target range for the three-month Libor is unchanged at between –1.25% and –0.25%. At the same time, the SNB will remain active in the foreign exchange market, as necessary. 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 Swiss franc is still significantly overvalued. The SNB’s expansionary monetary policy is aimed at stabilising price developments and supporting economic activity.

The new conditional inflation forecast suggests inflation will rise faster over the coming quarters than the SNB predicted in March, principally due to the significant increase in oil prices in the intervening period. The effect of this oil price rise on annual inflation vanishes after the first quarter of 2017. The new conditional forecast subsequently moves closer to that of the last quarter, and is in line with it from 2018. At –0.4%, the inflation forecast for 2016 is 0.4 percentage points higher than in March. For 2017, the SNB expects an inflation rate of 0.3%, compared to 0.1% forecast in the last quarter, while still anticipating a rate of 0.9% for 2018. The conditional inflation forecast is based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.

The moderate recovery in the global economy continues. It is particularly well advanced in the US, which is on the cusp of full employment. Economic growth in the euro area is gradually becoming more broad-based. In China, growth remains robust thanks to economic policy measures aimed at stimulating demand. Overall, international growth is principally being driven by domestic demand. By contrast, international trade and global manufacturing remain subdued. All in all, positive economic signals in recent months have helped ease the situation on the international financial markets, which were dominated by turbulence at the start of the year. Against a backdrop of rising confidence, commodity prices have also recovered from their lows. The SNB expects the moderate growth in the global economy to sustain over the coming quarters.

Nevertheless, significant risks remain for the global economy. Furthermore, the imminent UK referendum on whether to stay in the European Union may cause uncertainty and turbulence to increase.

In Switzerland, real GDP grew at an annualised rate of 0.4% in the first quarter. Available indicators suggest that the recovery will be ongoing. The gradual improvement in the international environment will also benefit Switzerland. Exports are likely to continue to recover, and this should stimulate corporate investment and have a positive impact on the labour market. The SNB expects the unemployment rate to stabilise in the second half of the year. For 2016 as a whole, it still anticipates real GDP growth of between 1% and 1.5%.

Growth on the mortgage market once again slowed somewhat in the first quarter of 2016. Real estate prices, by contrast, climbed at a marginally faster rate. Despite restrained momentum in recent quarters, imbalances on the mortgage and real estate market increased slightly due to comparatively weak growth in fundamentals. The SNB will continue to monitor developments on the mortgage and real estate markets closely, and will regularly reassess the need for an adjustment of the countercyclical capital buffer. "

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