SNB monetary policy: Assessing future bias

The Swiss National Bank (SNB) in its monetary policy meeting today decided to maintain its current expansionary monetary policy, which basically means –

• Interest on sight deposits at the SNB will remain at –0.75% and the target range for the three-month Libor will remain between –1.25% and –0.25%.
• At the same time, the SNB will remain active in the foreign exchange market.

Let’s look at the monetary policy statement for further clues and to assess the bias for future actions -

• SNB said that its policy is intended to make Swiss franc investments less attractive, thus easing pressure on the currency. The Swiss franc is still significantly overvalued. The central bank notes that Swiss franc has marginally since its last meeting in September, on the back of a stronger dollar. Easy policies are essential. (Mild dovish bias)
• The new conditional inflation forecast has been downgraded for the longer term and also for the shorter term as inflation has weakened recently due to a weaker than expected oil price. SNB reduced its inflation forecast for 2018 to 0.9 percent. For 2019, it reduced inflation forecast to 0.5 percent from 0.8 percent and forecasted 1 percent inflation for 2020. All forecast based on assumption that rates remain at -0.75 percent. (Dovish bias)
• Global growth lost momentum somewhat in the third quarter. However, this was largely attributable to special factors in the euro area and Japan. Economic expansion in the US and China remained robust. Employment figures in the advanced economies rose again and Berne, 13 December 2018 Press release Page 2/3 unemployment continued to decline. The growth in international trade in goods also continued. (Neutral bias)
• In its baseline scenario for global economic developments, the SNB anticipates solid growth in the coming quarters. In the short term, the world economy is set to continue to expand somewhat above potential, benefiting from the clear improvement in the labour market situation and the ongoing expansionary monetary policy in the advanced economies. However, a gradual slowdown is likely in the medium term. (Mild hawkish bias)
• Nevertheless, there are significant risks to this positive baseline scenario, primarily in connection with political uncertainties and protectionist tendencies. These factors have had an increasingly negative effect on both business and financial market sentiment in recent months. Stronger turbulence could jeopardize global economic growth and have an impact on monetary policy.
• In Switzerland, GDP fell by an annualized rate of 0.9%. Despite this decline, GDP was still 2.4% higher year-on-year thanks to the strong expansion in the previous quarters. A slowdown in GDP momentum was to be expected after several very strong quarters. Furthermore, the decline in GDP is also attributable to temporary factors. An analysis of all the available economic indicators points to momentum weakening slightly but remaining positive. The favorable development on the labour market also continued. Employment increased strongly in the third quarter. The unemployment rate declined again through to November to stand at 2.4%. The SNB now anticipates slightly lower GDP growth of around 2.5% for 2018 as a whole. As in other countries, economic momentum in Switzerland is likely to weaken somewhat in 2019. The SNB expects a rise of around 1.5% in GDP for the coming year. (Mild dovish bias)
• Risks are to the downside, as is the case with the global economy. In particular, a sharp slowdown internationally would quickly spread to Switzerland. (Dovish bias)
• According to the SNB’s assessment, Imbalances on the mortgage and real estate markets persist. Both mortgage lending and prices for single-family homes and privately owned apartments continued to rise at a moderate rate over recent quarters. Although prices in the residential investment property segment have stabilized, there is the particular risk of a correction due to strong price increases in recent years and growing vacancy rates. The SNB will continue to monitor developments on the mortgage and real estate markets closely, and will regularly reassess the need for an adjustment of the countercyclical capital buffer.  (Neutral bias)

Compared to the previous statements, this one is more dovish in nature. With monetary policy still remain dovish to neutrally tilt, SNB is unlikely to change its monetary policy anytime soon. 

Franc is currently trading at 0.992 per dollar.