Switzerland keeps rate, franc ceiling, cuts inflation and growth forecast

    The Swiss National Bank (SNB) kept its benchmark interest rate target unchanged, as expected, and affirmed its commitment to defend the exchange rate ceiling with “utmost determination,” but reduced its growth and inflation forecasts.
    The growth and inflation forecasts were reduced due to weaker growth worldwide and an underutilisation of production capacity in Switzerland along with the fact that the Swiss franc had not depreciated, as the SNB had expected.

    The SNB has kept its target range for the three-month Libor rate unchanged at zero to 0.25 percent since April 2009.

     ”It remains committed to buying foreign currency in unlimited quantities for this purpose. The Swiss franc is still high and is weighing on the Swiss economy. For this reason, the SNB will not permit an appreciation of the Swiss franc, given the serious impact this would have on both prices and economic performance in Switzerland,” the SNB said in a statement. 

    The SNB has intervened heavily to defend the limit in recent months, with foreign reserves now worth more than 70 percent of the Swiss Gross Domestic Product.
    But the euro has risen following the European Central Bank’s (ECB) plan last week to buy an unlimited amount of euro zone bonds if needed. The Swiss franc was trading at 1.21 euros today.
    The SNB did not comment on the ECB’s move, but said financial markets remain fragile and “growth prospects are being dampened by the euro area crises, on the one hand, and the uncertainty surrounding forthcoming fiscal policy decisions in the US, on the other.”
    “In the second quarter of 2012, economic growth weakened worldwide. Although the emerging economies continued to underpin the global expansion, their rates of growth were lower than expected,” the SNB said.
    It reduced the growth forecast for 2012 to around 1.0 percent from 1.5 percent forecast in June. The Swiss economy contracted by 0.1 percent in the second quarter from the first for an annual growth rate of 0.5 percent, down from a rate of 1.2 percent in the first quarter.
    “The further deterioration in the inflation outlook stems partly from the unfavourable prospects for the global economy and a more pronounced underutilisation of production capacity in Switzerland, and partly from the fact that a depreciation of the Swiss franc has failed to materialise as expected,” the SNB said.
    The inflation forecast was cut to a negative 0.6 percent for 2012 and a positive 0.2 percent for 2013. In August, the Swiss inflation rate was minus 0.50 percent, down from a positive 0.7 percent in July.
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