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Switzerland Monetary Policy December 2018

Switzerland: SNB keeps rates on hold in December; downgrades inflation outlook

At its meeting on 13 December, the Swiss National Bank (SNB) maintained the target range for the three-month Libor at between minus 1.25% and 0.25%, where it has been since January 2015. In addition, the interest rate on sights deposits was left unchanged at minus 0.75% and the Bank reiterated that its intervention in the forex markets to buffer against further appreciation of the Swiss franc remained crucial. The decision was in line with analysts’ expectations.

The basis of the Bank’s decision to stand pat was primarily the high valuation of the Swiss franc. While the franc has depreciated slightly against the dollar since the 20 September meeting, it has remained relatively steady against the euro and the SNB continues to deem the situation in the foreign exchange markets as “fragile”. The Bank determined the current expansionary monetary policy stance as necessary in order to detract the attractiveness of investments denominated in Swiss francs, which are considered safe havens, and consequently keep a lid on currency pressures. Moreover, the Bank cut its inflation outlook on softer economic growth prospects, giving further reason to maintain the status quo. The inflation outlook for 2019 was downgraded to 0.5% (September’s inflation forecast: 0.8%), while inflation for 2020 is now projected to be 1.0% (September’s forecast: 1.2%).

The SNB struck a dovish tone in its communiqué, contending that normalizing monetary policy would cause the currency to appreciate and weigh on export-oriented sectors. As a result, the Bank is likely to continue to leave the interest rates steady at low levels, while many analysts expect the NBS to wait until the ECB hikes its rate, before beginning to tighten. The Bank noted downside risks largely stem from a global economic slowdown, which would hurt Switzerland’s open economy. Moreover, a potential correction in the housing market is a key downside risk to the inflation outlook.

The next monetary policy meeting will take place on 21 March 2019.

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