SNB Keeps Rate at Record Low as Inflation Forecasts Trimmed

The Swiss National Bank kept interest rates unchanged at record lows, citing the strong currency and an absence of price pressures.

In a move predicted by all 26 economists in a Bloomberg survey, the central bank held its deposit rate at minus 0.75 percent on Thursday. It also affirmed its commitment to wage currency market interventions and reiterated that the franc was “significantly overvalued.”

“Available economic indicators suggest that the Swiss economy is on the road to recovery,” SNB President Thomas Jordan said at a press conference in Bern. “However, certain indicators suggest that the recovery has not yet taken hold in all areas of the economy,” he said, adding that “the strong Swiss franc continues to weigh on some industries.”

The central bank has been using a combination of negative rates plus purchases of foreign exchange for two-and-a-half years to limit the franc’s appeal. The rallying currency, sought out by investors at times of heightened risk aversion, has caused consumer prices to tumble and weighs on exporters, as their wares become more expensive abroad.

ECB’s Prisoner

While the franc has dipped about 1.5 percent against the euro this year as election outcomes in France and the Netherlands helped reduce political risks in the region, it remains stronger than 1.10 against the single currency. That’s far off the minimum exchange rate of 1.20 francs enforced by the SNB between 2011 and 2015. It traded at 1.08692 per euro at 12:28 p.m. in Zurich.

The Swiss central bank’s decision to stick with its policy comes hours after the U.S. Federal Reserve raised interest rates for the second time this year. Last week, the European Central Bank indicated it may be moving closer to an exit from unconventional stimulus by dropping an option to cut rate from its policy guidance.

“The SNB isn’t moving an inch from its expansive” stance, said Daniel Hartmann, an economist at Bantleon Bank in Zug, Switzerland. “Unlike the Fed or the ECB, the SNB has indeed no reason to push for an exit from its ultra-loose monetary policy or even prepare such a step,” he said. “On interest rate policy, the SNB is a prisoner of the ECB. It will only be able to raise the key rate after Frankfurt’s central bankers have acted.”

What Switzerland and the 19-country euro area have in common is a feeble rate of inflation despite a pickup in economic momentum. ECB President Mario Draghi has bemoaned the lack of convincing signs of a pickup in price growth, but he’s also expressed confidence that as the output gap closes and unemployment falls, inflation rates will climb toward the central bank’s goal.

More Leeway

“We have a negative output gap, we have inflation just at zero -- slightly above zero -- and we have this overvalued Swiss franc,” Jordan told Bloomberg Television’s Matt Miller in an interview. “So that’s the reason why we have to continue with our expansionary monetary policy.”

The SNB can still cut rates further and expand its balance sheet if needed, Jordan said.

The central bank’s mandate is for price stability, defined as a positive rate of inflation below 2 percent. It typically keeps mum about the interventions it has waged to stem appreciation pressure on the franc and last publicly acknowledged conducting them after Britain’s vote to leave the European Union almost a year ago. Yet data suggests the SNB’s purchases of foreign exchange have continued since then, pushing its currency reserves to 694 billion francs ($714 billion) in May.

The central bank on Thursday trimmed its inflation outlook for 2018 and 2019. The SNB forecasts growth of roughly 1.5 percent this year, with consumer prices expected to rise 0.3 percent in 2017, 0.3 percent in 2018 and 1 percent in 2019 respectively.

“We expect the SNB to remain on hold throughout 2017 and 2018 and only to increase policy rates in early 2019 after the ECB” does so, said Karsten Junius, chief economist at Bank J Safra Sarasin in Zurich. “As interest-rate differentials remain very low, we expect upward pressure on the franc to continue and foreign-currency interventions to remain necessary.”