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The Swiss National Bank (SNB) announced today that it is maintaining its expansionary monetary policy. The target range for three-month Libor remains unchanged at between –1.25% and –0.25%, and the interest rate on sight deposits with the SNB stays the same at –0.75%.
The announcement pushed the franc as high as 1.0795 against the euro in trading today, according to Bloomberg.
Despite depreciating a bit in recent months, the Swiss franc is still significantly overvalued says the SNB. The negative interest rate and the interest rate differential with other currencies make the Swiss franc relatively less attractive, and should continue to help weaken it, it added.
At the same time, the SNB says it will remain active in the foreign exchange market in order to influence the exchange rate as necessary. This means the SNB would create new Swiss francs and then use them to buy other assets, so increasing the number of Swiss francs in circulation. With more francs in circulation their price should fall, provided demand remains stable. This only works if supply is increasing faster than demand for the currency.
According to Bloomberg, Credit Suisse said SNB President Thomas Jordan is being too optimistic on the outlook and should have cut rates to weaken the franc and boost demand.
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SNB forecasts have changed little since September 2015. Inflation, now predicted to be -1.1% in 2015, is up by 0.1% from what was forecast in September 2015. In 2016 the SNB now predicts inflation of -0.5%, and in 2017 0.3%, up 0.1% from September’s forecast.
Global growth disappointed in the third quarter and the SNB has cut its growth forecast for the global economy slightly downwards for the short term. Overall, its assessment of global economic prospects is cautiously optimistic. Nevertheless, it sees significant risks. The structural change underway in China could continue to hold back global manufacturing and investment activity. Equally, structural weaknesses in Europe as well as current concerns about public safety could weigh on economic developments, the bank said.
According to early estimates, the Swiss economy saw no growth in the third quarter. A close examination of a broad range of indicators leads to a somewhat more positive assessment of the economy. Nevertheless, capacity utilisation remains unsatisfactory, and demand for labour muted. For 2015, the SNB still anticipates real growth of just under 1% in Switzerland. The gradual improvement of the global economy is likely to further strengthen foreign demand for Swiss goods and services. Domestic demand also looks set to remain robust. For 2016, the SNB expects growth of approximately 1.5%. The past few months have seen mortgage volumes and prices for owner-occupied residential real estate grow roughly in line with fundamentals. Imbalances on these markets have therefore remained largely unchanged, according to the SNB.