Switzerland keeps expansive policy, franc 'highly valued'

     The central bank of Switzerland maintained its ultra-easy monetary policy stance and willingness to intervene in foreign currency markets to curb the exchange rate of the Swiss franc, which it said "remains highly valued" after recent gains.
      The Swiss National Bank (SNB) has kept its benchmark target for 3-month Libor rates at minus 1.25 - 0.25 percent and the rate on bank's sight deposits at minus 0.75 percent since it stunned financial markets in January 2015 by scrapping an upper limit on the franc's rate to the euro.
       "The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly," the SNB said, adding its negative interest rates and a commitment to remain active in currency markets remain essential.
      Reflecting a rise in the franc's exchange rate against a weaker U.S. dollar between November and mid-February, the SNB lowered its inflation forecast slightly, with inflation this year seen averaging 0.6 percent from 0.7 forecast in December.
      For 2019 inflation is seen averaging 0.9 percent, down from 1.1 percent, and for 2020 inflation is seen rising to 1.9 percent.
       In February Switzerland's inflation rate dropped to 0.6 percent from 0.7 percent in January.
      Against the U.S. dollar, the franc was trading at 0.947, up 2.8 percent this year. Between November last year and mid-February the franc gained almost 9 percent but some of these gains have been given back since then.
       Against the euro, the franc was trading at 1.168 today, steady on the year. But the franc is still 2.7 percent higher against the euro than the rate of 1.20 cap that was scrapped a little over 3 years ago.
       Immediately following the SNB's move to scrap the upper limit on the franc, it surged over 20 percent but has been slowly losing ground since then.
      "The international economic environment is currently favorable," the SNB said, adding Swiss growth in the fourth quarter was mainly driven by manufacturing and capacity utilization had risen.
       Switzerland's Gross Domestic Product grew by an annual 1.9 percent in the fourth quarter of last year, up from 1.2 percent in the third quarter and the SNB said it still expects growth this year of around 2.0 percent, with unemployment continuing to decline.


      The Swiss National Bank issued the following statement:

"The Swiss National Bank (SNB) is maintaining its expansionary monetary policy, with the aim of stabilising price developments and supporting economic activity. 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%. The SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration.
Since the last monetary policy assessment in December, the Swiss franc has appreciated slightly overall on the back of the weaker US dollar. The Swiss franc remains highly valued. The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential. This keeps the attractiveness of Swiss franc investments low and eases pressure on the currency.
The SNB’s conditional inflation forecast has shifted slightly downwards as a result of the somewhat stronger Swiss franc. The forecast for the current year has decreased marginally to 0.6%, from 0.7% in the previous quarter. For 2019, the SNB now expects inflation of 0.9%, compared to 1.1% last quarter. For 2020, it anticipates an inflation rate of 1.9%. The conditional inflation forecast is based on the assumption that the three-month Libor remains at –0.75% over the entire forecast horizon.
The international economic environment is currently favourable. In the fourth quarter of 2017, the global economy continued to exhibit solid, broad-based growth. International trade remained dynamic. Employment registered a further increase in the advanced economies, which is also bolstering domestic demand.
The SNB expects global economic growth to remain above potential in the coming quarters. Given the robust economic situation, the US Federal Reserve plans to continue its gradual normalisation of monetary policy. In the euro area and Japan, by contrast, monetary policy is likely to remain highly expansionary.

In Switzerland, GDP grew in the fourth quarter at an annualised 2.4%. This growth was again primarily driven by manufacturing, but most other industries also made a positive contribution. In the wake of this development, capacity utilisation in the economy as a whole improved further. The unemployment rate declined again slightly through to February. The SNB continues to expect GDP growth of around 2% for 2018 and a further gradual decrease in unemployment.

Imbalances on the mortgage and real estate markets persist. While growth in mortgage lending remained relatively low in 2017, prices for single-family houses and owner-occupied apartments began to rise more rapidly again. Residential investment property prices also rose, albeit at a somewhat slower pace. Owing to the strong growth in recent years, this segment in particular is subject to the risk of a price correction over the medium term. 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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