Switzerland maintains rates and easy policy commitment

    Switzerland's central bank maintained its negative interest rates and confirmed that it still considers the Swiss franc to be "significantly overvalued" and it will remain active in the foreign exchange market to make Swiss franc investments less attractive and thus ease pressure on the currency.
    The Swiss National Bank (SNB), which stunned foreign exchange markets in January 2015 by scrapping an upper limit on the exchange rate of the franc, left its interest rate on sight deposits at the central bank at minus 0.75 percent along with the benchmark target range for 3-month Libor between minus 1.25 percent and minus 0.25 percent.
    After the SNB abolished the 1.20 franc cap against the euro, the franc jumped sharply but has remained steady. The franc was trading at 1.07 to the euro today, slightly up from 1.08 at the start of the year.
    Compared with its last policy decision in September, the SNB said it had revised slightly downwards its inflation forecast, reflecting lower data in October and November.
    For 2016 the SNB still sees inflation averaging minus 0.4 percent while the forecast for 2017 was trimmed to 0.1 percent from 0.2 percent. For 2018 inflation is seen averaging 0.5 percent, down from the September forecast of 0.6 percent.
    Switzerland's inflation rate was minus 0.3 percent in November, the 25th month in a row of deflation.
    Switzerland's economy grew by an annual rate of 1.3 percent in the third quarter, down from 2.0 percent in the second quarter, and the SNB said data pointed to continued moderate growth that is in line with its forecast for 1.5 percent this year.
   "The outlook for the coming year is cautiously optimistic," the SNB said, forecasting growth of roughly 1.5 percent.


    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, 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 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.

Compared to September, the new conditional inflation forecast has been revised slightly downwards in the short term. This mainly reflects the fact that inflation in October and November was slightly lower than expected. The SNB nevertheless anticipates an unchanged inflation rate of –0.4% for 2016. For 2017, however, the forecast is down to 0.1%, from 0.2% in the previous quarter. For 2018, the SNB now expects inflation of 0.5%, compared to 0.6% in the third quarter. 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 has continued to recover in line with the SNB’s expectations. In the US, third-quarter GDP growth was again significantly above potential. Furthermore, the situation on the labour market continued to improve. The other major economic areas also recorded favourable economic activity in the third quarter. The euro area and Japan continued to register moderate growth, while in China, growth remained strong thanks to a variety of fiscal measures. In the UK, the economic impact of the Brexit decision has so far proved less pronounced than originally feared.

The SNB expects the moderate pace of global growth to continue in 2017. The baseline scenario for the world economy is still subject to considerable risks, however. Structural problems in a number of advanced economies could negatively affect the outlook. Added to this are a multitude of political uncertainties which are particularly associated with the future course of economic policy in the US, upcoming elections in several countries in the euro area as well as the complex and arduous exit negotiations between the UK and the EU.

According to an initial quarterly estimate, GDP in Switzerland grew at an annualised rate of 0.2% in the third quarter. This small increase must also be seen in the context of high growth in the second quarter. Year-on-year, GDP rose by 1.3% in the third quarter. Overall, economic indicators point to a continuation of the moderate economic recovery in Switzerland and are thus consistent with our previous GDP growth forecast of around 1.5% for 2016 as a whole. Developments on the labour market support this view. Up until November, the seasonally adjusted unemployment rate for this year was stable at 3.3%. Survey-based labour demand indicators have recovered further.
The outlook for the coming year is cautiously optimistic. As for 2016, the SNB expects GDP growth for 2017 to be roughly 1.5%. Prevailing international risks mean that forecasts, including Switzerland’s, continue to be fraught with considerable uncertainties.

Over the last six months, growth on the mortgage and real estate markets has remained fairly constant at a relatively low level. At the same time, imbalances on these markets have decreased slightly overall due to developments in fundamentals. However, imbalances are still at a similarly high level as in 2014, when the sectoral countercyclical capital buffer was set at 2%. 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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