SNB Holds Negative Interest Rates; Cuts Inflation Outlook

The Swiss National Bank kept its expansionary monetary policy unchanged on Thursday and trimmed its inflation forecast reflecting weak price pressures.

The interest rate on sight deposits at the central bank was kept unchanged at -0.75 percent and the target range for the three-month Libor was retained between -1.25 percent and -0.25 percent.

The SNB reiterated that the Swiss franc is "still significantly overvalued".

The central bank said the negative interest rate and its willingness to intervene in the foreign exchange market are intended to make Swiss franc investments less attractive.

The SNB forecast 0.3 percent inflation for this year, the same as predicted in March. For 2018, the bank lowered its outlook to 0.3 percent from 0.4 percent.

For 2019, the bank projected 1 percent inflation instead of 1.1 percent estimated in March.

SNB Chief Thomas Jordan said the expansionary monetary policy remains necessary in order to ensure price stability, while taking due account of economic developments.

Jordan said available economic indicators suggest that the Swiss economy is on the road to recovery. The strong Swiss franc continues to weigh on some industries, he said.

The economy is forecast to grow roughly 1.5 percent this year, unchanged from the March projection.

Jessica Hinds, an economist at Capital Economics, expects the SNB to continue to intervene as needed and to leave its key interest rate on hold for some time yet.

The economist said the improving economic backdrop and the European Central Bank moves towards policy normalization will allow the SNB to start tweaking its language later this year, perhaps softening its approach on currency interventions which have swelled its balance sheet.

The SNB observed that growth in mortgage lending remained constant at a relatively low level. Owing to developments in fundamentals and the generally subdued activity on the mortgage and residential real estate markets, imbalances have fallen slightly in recent quarters, the bank said.

"Nevertheless, they are still just as pronounced as they were in 2014, when the sectoral countercyclical capital buffer was set at 2 percent," the SNB added.

The bank vowed to continue to monitor developments on these markets closely and to regularly reassess the need for an adjustment of the countercyclical capital buffer.

In the Financial Stability Report, also released on Thursday, the SNB said the international and domestic economic conditions for the Swiss banking sector continue to improve.