Swiss National Bank maintains expansionary monetary policy, willing to intervene against CHF strength

The Swiss National Bank is maintaining its expansionary monetary policy. The central bank kept the interest on sight deposits unchanged at -0.75 percent, while the target band for the three-month Libor was maintained at 1.25 percent to -0.25 percent, unchanged since January 2015. The Swiss National Bank continues to be in wait-and-see mode. Also, the central bank mentioned in its policy statement that it would continue to be active in the foreign exchange market, as necessary.

The SNB considers the CHF “significantly overvalued”. The central bank intends to ease the upward pressure on the Swiss franc. According to the SNB, its expansionary policy is aimed at stabilizing price developments and underpinning economic activity. The exchange rate is expected to remain the main focus for monetary policy, said Nordea Bank in a research note. There are no signs that the SNB would change its policy rates any time soon.

Meanwhile, the central bank has slightly revised its inflation projection downwards from its June forecasts. The SNB now expects inflation to be 0.2 percent next year, as compared with its earlier estimate of 0.3 percent, whereas it lowered the 2018 inflation forecast to 0.6 percent from 0.9 percent.

On the economic growth front, the central bank expects the economy to continue recovering. But, growth is likely to be more moderate in the second half of 2016 as compared with the first half, partially because of a temporary weakening of growth in Europe. For 2016 as a whole, the Swiss National Bank anticipates the economy to expand 1.5 percent. On the other hand, it foresees downside risks to the global economy due to several structural problems.

Currency intervention is considered as the central bank’s preferred instrument against a likely further strengthening of the Swiss franc, noted Nordea Bank. The SNB is not expected to ease further. But if the CHF strengthens sharply, a rate cut is possible.  The CHF continues to be one of the most overvalued currencies in the G10 space, and is likely to weaken over time, according to Nordea Bank.

“We expect EUR/CHF at 1.10 by end-2016 and 1.12 in mid-2017”, added Nordea Bank.