SNB leaves interest rates at record low; 'minimum exchange rate' remains at CHF1.20 per EUR
 
As was widely expected, the Swiss National Bank (SNB) kept its official interest rate unchanged today, with the target range for 3m Libor remaining between zero and 0.25% (set on 3 August 2011). What is more, the SNB confirmed the "minimum exchange rate" at CHF1.20 per EUR, resisting ongoing pressure from industry to further curb the currency's strength.

(Note that the "minimum exchange rate" policy was set on 6 September 2011, accompanied by the wording: "The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities". Indeed, the SNB has kept buying the EUR against issuing new CHF balances. As a result, the Swiss monetary base (banknotes in circulation plus banks' sight deposits held with the SNB) stood at CHF243.2bn in October (last available data), down slightly from CHF254.4bn a month ago, but still well above the CHF49.6bn pre-crisis seen at the end of 2008).

In terms of growth, the SNB forecasts are marked deceleration, but no recession: "For 2011 as a whole, real GDP growth of 1.5-2.0% can be expected. This is only because of the favourable economic development in the first half of the year. For 2012, the SNB is expecting economic growth in the order of 0.5%". The SNB stresses the level of high uncertainty: "The international outlook continues to be highly uncertain. A further escalation of the European sovereign debt crisis cannot be ruled out. This would have grave consequences for the international financial system. Moreover, given our country's close relations with the euro area, Switzerland's economic prospects are highly dependent on how the crisis develops."

In terms of inflation, the bank forecast y/y CPI inflation (average) of 0.2% in 2011 (down from 0.4% forecast in September), -0.3% in 2012 (unchanged) and 0.4% in 2013 (down from 0.5%). In the forecast period (which ends in Q3 13, inflation is forecast to remain below the 2% level.

Overall, today's decisions was hardly a surprise, and we expect the bank to keep rates at record lows for the foreseeable future. What is more, the bank can be expected to keep defending its exchange rate versus the EUR with ongoing unlimited interventions - especially so if the growth outlook deteriorates further.


source: BarCap