CH: SNB Monetary Policy Assessment

Thu Sep 14 02:30:00 CDT 2017

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

The SNB's September Monetary Policy Assessment (MPA) contained no major surprises. As widely anticipated, the central bank kept its target corridor for 3-month CHF Libor at minus 1.25 percent to minus 0.25 percent and the deposit rate at minus 0.75 percent. However, it did modify its view of the Swiss franc which, in the wake of the currency's recent losses, is now seen as 'highly valued' as opposed to the 'significantly overvalued' status of recent MPAs. Even so, the central bank indicated that it would remain active as necessary in the FX markets; it will not want see the CHF start to appreciate again.

The weaker tone to the currency has been reflected in the updated economic forecasts which show a higher inflation rate over the entire projection horizon. Even so, at 0.6 percent for the end of 2018 and 1.4 percent for end-2019, the new predictions are just a tick above their respective June MPA calls.

The minimal adjustment here is due to a softer view of economic growth in 2017 which, in the light of a poor first half, has been revised down from 1.5 percent to just under 1.0 percent. Indeed, this scenario might have been weaker still but for the improvement in the international environment which has made for some renewed momentum in Swiss exports.

In sum, the SNB is clearly relieved about the rise in EUR/CHF since late July but must also be concerned about the sluggishness of the economic recovery at home. To this end, the general thrust of policy will remain centred on putting an unofficial floor under EUR/CHF. This suggests that monetary policy will stay highly accommodative for some considerable time yet.

The Swiss National Bank (SNB) usually announces any changes to its monetary stance at its quarterly Monetary Policy Assessment. However, adjustments can be made at any time. Since 2000 monetary policy has consisted of the following three elements: a definition of price stability, a medium-term inflation forecast and †at operational level †a target range for a reference interest rate, the three-month Swiss franc Libor (London Interbank Offered Rate). The SNB attempts to secure an annual inflation rate as specified by the consumer price index (CPI) of less than 2 percent. In recent times this has involved sizeable intervention in the foreign exchange market to prevent appreciation of the Swiss franc although since January 2015 there has been no explicit exchange rate target.

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.