The Swiss National Bank kept its deposit rate at a record low of -0.75% on Thursday, in line with market expectations. The central bank also kept the three month Libor rate between -1.25% and -0.25%. The SNB has kept the deposit rate at record lows with the stated aim of making investments in the Swiss currency less attractive and thus gradually weakening the franc.
In January the Swiss central bank removed the exchange rate ceiling between the Swiss franc and the euro that was put in place in 2011 with the exchange rate between the euro and the franc plunging by around 20%, hitting eleven-year lows. This has given rise to deflation again in the first quarter of 2015 after managing in 2014 to have positive inflation for the first time since 2011.
The SNB reinstated its policy of intervening in the foreign exchange market to influence monetary conditions while taking into account the exchange rate of the franc, which it has stated that it is “significantly overvalued”. The Swiss economy is on the verge of its first recession in six years with the Swiss economy shrinking by 0.2% in the first quarter of 2015.
The Bank warned that uncertainty about the future of the global economy remains high, threatened by various risks with the foremost being the difficult financial situation of Greece. The global uncertainty has made investors turn to safe havens such as the Swiss franc. The strength against the euro however, has undermined Swiss exports, hurting growth. On whether the bank will introduce further cuts to the deposit rate, SNB President indicated that the bank will wait and observe the international developments.
The SNB has forecasted that inflation will reach its lower point in the third quarter of 2015 at -1.2%. Due to higher expected oil prices, June’s forecast has been revised up to -1% in 2015 and -0.4% in 2016, with inflation moving to positive figures in 2017 to 0.3%. As for GDP growth, the central bank is hoping that the global economic momentum will help the Swiss economy grow in the second half of the year, pushed by rising demand for Swiss goods.
The euro /franc rate fell slightly at the announcement, from 1.0459 before the announcement to 1.0442. Dollar / franc rate was also weaker, falling to 0.9153 after the announcement.
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