SNB reaffirms minimum exchange rate

The SNB says the risk of deflation for Switzerland has increased again Keystone

The Swiss National Bank (SNB) is maintaining its minimum exchange rate of CHF1.20 per euro and is leaving the target range for the three-month LIBOR unchanged at 0.0-0.25%. 

Thursday’s announcement came a day after the Federal Reserve, the United States central banking system, signalled that it planned to keep a key interest rate at a record low for a “considerable period” because a broad range of US economic measures remain subpar. 

In a statement, the SNB said the economic outlook had “deteriorated considerably”. 

“The Swiss franc is still high. With the three-month LIBOR close to zero, the minimum exchange rate remains the key instrument to avoid an undesirable tightening of monetary conditions.” 

It said it would therefore continue to enforce the minimum exchange rate “with the utmost determination”. For this purpose, it was prepared to purchase foreign currency in unlimited quantities. 

The SNB’s conditional inflation forecast of September points to significantly lower inflationary pressure in the medium term. However, from mid-2015 onwards, inflation is set to be lower. 

“This is mainly due to the deterioration in the global economic outlook and slower growth in Switzerland,” the national bank said. 

For the current year, the inflation forecast of 0.1% remains unchanged. The new forecast for 2015 of 0.2% is 0.1 percentage points lower than at the last monetary policy assessment, while the forecast for 2016 of 0.5% is even lower, namely by 0.4 percentage points. 

“For Switzerland, the risk of deflation has thus increased again,” the SNB concluded. 

Global deterioration 

Since the monetary policy assessment in June, there has been a deterioration in the international environment. 

“Although the US economy rebounded in the second quarter following a weather-related winter slump, the major euro area economies experienced considerably weaker growth than expected, and inflation was again very low. In many of the emerging economies, too, growth was lacklustre,” it said. 

The SNB expected the global economic recovery to be weaker in the approaching quarters than previously forecast. Economic developments in the US are still likely to drive growth, it reckoned, while in the euro area, growth looks set to remain modest. 

Furthermore, the global economic recovery remains vulnerable to setbacks. “Geopolitical tensions could further weigh on corporate and consumer confidence. The consolidation of public finances, the implementation of reforms aimed at promoting growth and the completion of the assessment of banks’ balance sheets still pose significant challenges for the euro area.” 

For its part, the Federal Reserve said on Wednesday it planned to keep its benchmark rate near zeroExternal link as long as inflation remained under control, until it saw consistent gains in wage growth, long-term unemployment and other gauges of the job market. 

In a statement ending its latest policy meeting, the Fed said it would make another $10 billion (CHF9.4 billion) cut in the pace of its purchases, which have been intended to keep long-term borrowing rates low.