Swiss Central Bank Retains Negative Rates; Expects Inflation To Exceed Target

The Swiss National Bank maintained its expansionary monetary policy stance on Thursday and reaffirmed its commitment to remain active in the foreign exchange market when necessary although the franc weakened against the euro and the US dollar.

Further, the bank forecast inflation to exceed its target in three years' time due to the weaker currency.

The interest rate on sight deposits at the SNB was retained at -0.75 percent and the target range for the three-month Libor was kept unchanged between -1.25 percent and -0.25 percent, the bank said in a statement.

The overvaluation of the Swiss franc has continued to decrease, yet the franc remains highly valued, the bank noted. The depreciation of the Swiss franc reflects the fact that safe havens are currently less sought after.

Yet, the SNB saw this development as still fragile. Therefore, despite the easing of the situation, the negative interest rate and the central bank's willingness to intervene in the foreign exchange market as necessary remain essential.

A renewed appreciation of the franc would still be a threat to price and economic developments, the bank said.

SNB President Thomas Jordan said the expansionary monetary policy remains appropriate in order to underpin the recovery, and thereby ensure price stability, while taking due account of economic developments.

The SNB will be unwilling to raise interest rates until after the European Central Bank has begun its process of policy normalization, Jessica Hinds, an economist at Capital Economics, said.

The economist expects the SNB to see how the ECB's tightening progresses before following suit and expect Swiss interest rates to remain on hold until early 2020.

In its Winter forecast, released on Thursday, the KOF institute said that the negative interest phase will be slowly coming to an end. The think tank expects a first rise in long-term interest rates next year and in 2019 a slow increase in the still negative short-term interest rates.

KOF forecast the economy to grow 2.3 percent in 2018 and by 1.7 percent in 2019.

The recovery in the Swiss economy looks set to continue in the coming months, the central bank noted. For 2018, the SNB forecast GDP growth of around 2 percent, compared to 1 percent in 2017.

The bank expects 0.5 percent inflation instead of 0.4 percent. For 2018, inflation forecast was revised up to 0.7 percent from 0.4 percent, while the projection for 2019 was maintained at 1.1 percent.

Inflation is forecast to rise to 2.1 percent in the third quarter of 2020, which is above the central bank's goal of below 2 percent.