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Switzerland Monetary Policy June 2019

Switzerland: SNB maintains ultra-loose monetary policy in June; introduces SNB policy rate

At its meeting on 13 June, the Swiss National Bank (SNB) maintained its current expansionary policy stance as had been expected by market analysts. The Bank also announced an adjustment in its monetary policy strategy and introduced a SNB policy rate, which will replace the use of the target range for the three-month Libor. The SNB policy rate is set at minus 0.75%, which corresponds to the midpoint of the previous target range for the three-month Libor. Subsequently, the Bank kept the interest rate on sight deposits unchanged at minus 0.75%.

The SNB’s latest decision came against a challenging external backdrop including a more dovish ECB and global growth woes, which have boosted safe-haven demand for the Swiss franc. Consequently, in a bid to avoid an appreciation of the franc, which the Bank still deems to be overvalued, the Bank decided to keep interest rates negative. Domestic conditions also gave the Bank good reason to hold fire. Inflationary pressures remain muted and risks still tilt to the downside, although the SNB marginally revised up its inflation estimates to 0.6% in 2019 on higher import prices (April’s projection: 0.3%) and 0.7% in 2020 (April’s estimate: 0.6%).

The main reason for the policy change is the uncertainty over the future of the Libor rate, which is in the wake of a manipulation scandal that threatens the very existence of the benchmark. Given that the Libor rate is only guaranteed through 2021, and is used by the Bank in their conditional inflation forecasts, “the introduction of the SNB policy rate ensures that it will be based on the same interest rate over the entire horizon”—which ends in 2024.

The Bank’s forward guidance was little changed from its first quarter meeting and maintained that a negative interest rate was essential for detracting interest from franc-based investments, and thus to curb safe-haven demand. Moreover, the SNB reiterated that it would intervene in the foreign exchange market as needed. The ECB’s dovish stance also gives the Bank little scope to tighten its own stance without triggering a sharp appreciation of the currency. The Bank has gone to great lengths to avoid further strengthening of the franc, which would weigh on export-oriented sectors and put additional downward pressure on inflation. As a result, the Bank is likely to continue to leave the interest rates at historically-low levels, while many analysts expect the SNB to wait until the ECB hikes its rate, before beginning to tighten. Commenting on ING’s take on the meeting, economist Charlotte de Montpellier noted: “We will probably have to wait for the next economic cycle to see the Swiss central bank raise rates, which means not before 2023.”

The next monetary policy meeting is scheduled for 25 September 2019.

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