CH: SNB Monetary Policy Assessment

Thu Sep 17 02:30:00 CDT 2015

Consensus Actual Previous
Change 0bp 0bp 0bp
Level -0.75% -0.75% -0.75%

The SNB opted to leave policy on hold at today's quarterly Monetary Policy Assessment (MPA). The target range for 3-month CHF LIBOR duly stays at minus 1.25 percent to minus 0.25 percent with the deposit rate pegged at minus 0.75 percent.

Today's decision was not unexpected in the wake of a surprisingly early return to positive GDP growth last quarter and, at least as important, recent losses by the CHF against the euro. Still, even if the real economy and the exchange rate have been bettered behaved of late, inflation continues to move in the wrong direction. Indeed, at minus 1.4 percent, annual CPI inflation in August recorded its lowest reading since 1950. Moreover, the likelihood is that the CHF, which the SNB still sees as significantly overvalued, would be a good deal stronger but for the central bank making the most of seasonally thin markets and intervening to weaken the unit.

The new economic forecasts acknowledge stronger than expected second quarter output but also heightened uncertainty about the global picture. As a result, domestic real GDP growth in 2015 is still put at around the 1.0 percent mark. However, largely on the back of weaker oil prices, inflation in 2015 has been marked down from minus 1.0 percent to minus 1.2 percent and in 2016 is seen a tick lower at minus 0.5 percent. A return to above zero inflation is still not anticipated before the start of 2017.

Not surprisingly therefore, the overall tone of the new MPA is suitably cautious. The SNB must be happy with the 5 percent depreciation of its currency since July but clearly wants to see more. To be sure, with the risk of renewed turbulence in the emerging markets, it will be keeping a very wary eye on how the unit responds should the Fed raise interest rates today. To this end, while another local interest rate cut is less likely now, it clearly remains at least a possibility over coming months. Policy will stay very accommodate for a long time yet.

The Swiss National Bank usually announces its interest rate policy on a quarterly basis as part of its Monetary Policy Assessment. However, emergency measures can be announced at any time.

The aim of the SNB's monetary policy is to ensure price stability in the medium and long term. By keeping prices stable (2 percent annual inflation rate), the SNB seeks to create an environment in which the economy can fully exploit its production potential. The Bank is required to set its policy to meet the needs of the Swiss economy as a whole rather than the interests of individual regions or industries.

The SNB has traditionally implemented its monetary policy by fixing a target range of 1.0 percentage points at the level deemed appropriate for the three-month Swiss franc Libor. The Bank has then normally sought to hold the rate around the middle of that corridor. However, as a result of strong capital inflows into the local currency prompted by the 2008/09 global downturn, this objective range has been both narrowed and reduced to just 0.0 - 0.25 percent, with a point target of 0.0 percent. In fact, since September 2011 the thrust of policy has been determined largely by the SNB's expressed aim of preventing the CHF strengthening beneath a CHF1.20 floor versus the euro.

The Swiss National Bank publishes its monetary policy assessments on a quarterly basis in March, June, September and December. In these reports it describes the current monetary environment and formulates its monetary policy intentions for the following quarter. It also provides inflation forecasts which help financial markets to formulate of where monetary policy might be headed. Twice a year -- in June and in December -- the Bank holds a media conference. At that time, the Governing Board provides information about the economic situation and comments on its monetary policy.