CH: SNB Monetary Policy Assessment

Thu Mar 15 03:30:00 CDT 2018

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

Since the last MPA in December, the CHF has actually appreciated a little on the back of a weaker U.S. dollar. This has contributed towards a slightly softer profile for forecast inflation which is now put a tick lower at 0.6 percent this year and 0.2 percentage points weaker at 0.9 percent in 2019. The 2020 projection is 1.9 percent, so in line with the SNB's price stability goals. However, by the fourth quarter of 2020 inflation is now seen at 2.2 percent and so just above target. These predictions assume 3-month Libor remains at minus 0.75 percent throughout. Real GDP growth is forecast at 2.0 percent this year, unchanged from the December call.

There is very little new in today's MPA which simply underlines the SNB's willingness to retain negative interest rates and as well as its preparedness to intervene in the FX markets in order to cap its currency. The pick-up in CPI inflation from a low of minus 1.4 percent in November 2015 to 0.6 percent as of last month has been largely fashioned by the slide in the CHF that began in earnest around the middle of last year. Domestic price pressures are still quite benign despite some increase in capacity utilisation and slowly falling unemployment. To this end, any renewed strength in the local currency could seriously jeopardise the progress on inflation made so far and push the normalisation of monetary policy even further into the distance.

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.