SNB keeps rates unchanged, slightly lowers projection for 2016 GDP growth and inflation

The Swiss National Bank (SNB) today kept the sight deposit rate on hold at -0.75% and the 3m-Libor target range at -0.25% to -1.25%, on par with expectations. The backdrop for the meeting was similar to the December’s, as the global economic outlook worsened and the ECB introduced additional easing measures again last week.

Even of the ECB’s stimulus package was more dovish than anticipated and more expansionary than December’s, the Swiss franc was able to fend off any notable appreciation after the announcement. The franc’s relatively muted reaction to ECB’s policy announcement permitted the SNB some room in March. However, the central banks said that the currency is still “significantly overvalued”. Hence, the central bank will remain active in the foreign exchange market to influence the exchange rate developments where required.

The central bank, amidst a weaker global economic scenario, has slightly lowered its GDP growth projection. After the sluggish growth of just under 1% in 2015, the central bank now projects the economy to expand in the range of 1% to 1.55 in 2016, as compared with t he earlier forecast of 1.5%. The SNB stated that ‘sluggish’ trade and manufacturing and additional decline in oil prices ‘will continue to hold back the global economy over the coming months’. Hence, the central bank has a slightly more negative view towards the international factors.

The conditional inflation profile of the SNB was also slightly revised lower after the below expected inflation in January and February. The further decline in oil prices will continue to negatively impact inflation in the short term, whereas a weaker global inflationary environment since December will lead to lower inflation in the medium term.

“Inflation is expected to remain well below the SNB's 2% target for the entire projection period, and the SNB now sees inflation in 2016 at -0.8% (prev: -0.5%) before returning to positive figures at 0.1% in 2017 (prev: 0.3%) and 0.9% in 2018”, says 4cast.

In all, alterations to the SNB’s forecasts in its March monetary policy assessment show a slightly weaker prospect for inflation and growth. It seems that Switzerland is continuing with its slow economic rebound. The economy will improve in 2016 in comparison to 2015 in terms of both inflation and GDP growth in spite of the weaker global economic environment. Currently, the SNB’s projections are based on the assumptions that interest rate will be on hold for the entire forecast period.

“We do not expect any further rate cuts unless the franc should appreciate significantly as we expect the SNB is very hesitant to cut interest rates even lower for fears that it would precipitate a flight to cash. Instead, we believe the bank will prefer to remain active in the FX market as necessary in order to take control of the exchange rate situation”, says 4cast.