Swiss National Bank keeps ultra-loose monetary policy

FAN Editor
The Swiss National Bank (SNB) is pictured in Bern
FILE PHOTO: The Swiss National Bank (SNB) is pictured in Bern, Switzerland May 30, 2018. REUTERS/Denis Balibouse

June 21, 2018

By John Revill

BERN (Reuters) – The Swiss National Bank maintained its expansionary monetary policy on Thursday, citing a “fragile” exchange rate situation that made it essential for the central bank to keep interest rates negative and be ready to intervene in currency markets.

The SNB kept its target range for the three-month London Interbank Offered Rate (LIBOR) at -1.25 to -0.25 percent, as unanimously forecast in a Reuters poll of economists.

The central bank also held the interest rate it charges on sight deposits at -0.75 percent, adding it remained ready to intervene in the foreign currency markets to block a rise in the Swiss franc.

Both measures have been employed by the SNB to stem investor appetite for the franc over the last three-and-a-half years.

The SNB maintained its description of the franc as “highly valued”, adding that despite the currency’s weakening during 2018 the situation on the currency markets was “fragile”.

“The Swiss franc initially depreciated slightly against the U.S. dollar and the euro,” the SNB said. “However, in light of political uncertainty in Italy, we have since seen countermovement, particularly against the euro.

“The situation on the foreign exchange market thus remains fragile, and the negative interest rate and our willingness to intervene in the foreign exchange market as necessary therefore remain essential.”

The SNB is expected to be among the last central banks to normalize its negative rates.

The U.S. Federal Reserve is already well into its rates rising cycle, and the European Central Bank has said it will end its bond buying scheme by the end of this year although it also signaled that any hike in interest rates was still some way off.

ECB President Mario Draghi said this week the bank would take a patient and gradual approach to raising rates, with the market expecting its first hike in its deposit rate in September 2019.

Most economists reckon the SNB cannot move before the ECB because higher Swiss rates would revive upwards pressure on the franc, which would be a problem for the export-reliant Swiss economy.

Earlier this week the Swiss government warned that economic risks had increased in recent weeks, citing the trade dispute over United States steel tariffs and uncertainties triggered by Italy’s new anti-establishment government.

This Italian situation in particular could generate “upward pressure” on the safe-haven franc, the Swiss government said on Tuesday.

The SNB kept its economic outlook for Switzerland, saying it still expected GDP growth of 2.0 percent.

It expected inflation of 0.9 percent this year, up from the 0.6 percent projection in March due to a marked rise in the price of oil. It expects inflation of 0.9 percent in 2019 and 1.6 percent in 2020, down from the previous forecast of 1.9 percent, mainly due to the muted outlook in the euro area.

(Reporting by John Revill, editing by John Miller)

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