CH: SNB Monetary Policy Assessment

Thu Jun 21 02:30:00 CDT 2018

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

June's Monetary Policy Assessment (MPA) contained few surprises and left the SNB toeing much the same policy line as it did in March.

The target range for 3-month CHF Libor was duly left at minus 1.75 percent to minus 0.25 percent and the key deposit rate is still pegged at minus 0.75 percent. On the CHF, the central bank retained its view that the currency was still 'highly valued' and, predictably, noted the risks of renewed appreciation due to the rising threat of a global trade war and political instability in Europe.

In terms of the economic outlook, real GDP growth is still put at 2.0 percent this year, in line with the forecast made in the March MPA. Inflation expectations have been revised up in the short-term due to higher oil prices and the 2018 forecast (0.9 percent) is 0.3 percentage points above the previous call. However, from the middle of 2019 the profile has been trimmed on the back of a softer outlook for economic activity in the Eurozone. As a result, predicted inflation is unchanged at 0.9 percent next year but 0.3 percentage points lower at 1.6 percent in 2020.

In the wake of the ECB's decision last week to keep its benchmark refi rate at 0.0 percent through at least the middle of 2019, the SNB knows that it has to tread very carefully. Any action that might be interpreted in financial markets as a move away from its longstanding highly accommodative monetary stance could trigger fresh inflows into the CHF. As it is, the currency's safe-haven status is already a major potential threat should international investors become significantly more risk averse.

To this end, further intervention by the central bank is very possible as its seeks to protect the EUR/CHF1.15 level. A major break back below this level could wipe out any hopes of getting underlying inflation back to anywhere near the 2 percent mark; indeed, the rate could easily turn negative again.

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.