Switzerland: SNB holds unchanged rates in March on stronger franc and as safe-haven fears intensify
On 15 March, the Swiss National Bank (SNB) decided to hold the target range for the three-month Libor unchanged at between minus 1.25% and minus 0.25%, a move that was widely expected by market analysts. It came as the recovery of the Swiss economy has gained considerable momentum. Moreover, the Bank held the interest rate on sight deposits steady at minus 0.75% and asserted its ability to intervene in foreign exchange markets when necessary as a means of weakening the “highly valued” Swiss franc. With March’s decision, the Bank’s expansionary policy rates have been kept on hold for more than three years—since January 2015.
Already highly valued, the franc appreciated slightly since December’s monetary policy assessment on the back of a weaker dollar. Moreover, global developments—including growing protectionism and threats of a global trade war—could spark further interest in franc-denominated investments as safe-haven assets, although the strength of the global economy and the Bank’s negative interest rates have thus far suppressed this appetite. That said, the Bank noted the international economic environment has been favorable for Switzerland’s economy in recent months, especially strong global trade dynamics and their effect on domestic demand. Meanwhile, the recent appreciation of the franc pushed the Bank to downgrade its inflation forecasts slightly despite strengthening economic growth, in effect keeping expansionary policies in place for the time being.
Looking ahead, the Bank indicated that rates would remain at their current levels for the foreseeable future. Moreover, under the assumption that the three-month Libor would be unchanged through the forecast horizon, the Bank downgraded its inflation forecasts for 2018 and 2019—to 0.6% and 0.9%, respectively. By the second half of 2020, the Bank still expects inflation to climb marginally above 2.0%—its target for price stability—and is likely the earliest it will consider normalizing rates. In the short term, however, SNB officials stressed that risk aversion could return at any time and push up the franc. Another important factor fending off a rate hike in the short term is the ECB’s slow move towards own policy normalization, although a small step was taken in March as European officials dropped a longstanding pledge to expand the ECB’s bond buying program if necessary. Concerned about the euro-franc spread, the SNB will almost certainly wait for the ECB to hike rates, to stay investor appetite for the franc.