Swiss central bank lowers growth outlook, holds key rate

GMT 13:44 2014 Thursday ,18 September

Arab Today, arab today Swiss central bank lowers growth outlook, holds key rate

The Swiss central bank
Geneva - AFP

Switzerland's central bank held its key interest rate steady on Thursday and restated its pledge to hold down the value of the Swiss franc, but warned the economic outlook had "deteriorated considerably".
The Swiss National Bank (SNB) maintained its target range for the franc's three-month London interbank offered rate, known as the Libor rate, at between 0.0 and 0.25 percent.
The bank also reiterated its longstanding commitment to maintain an exchange-rate floor of 1.20 Swiss francs to the euro.
But despite the floor and the historically low Libor, SNB warned that "the economic outlook has deteriorated considerably."
Analysts with Capital Economics said the bank's decision "to leave policy on hold comes as a slight disappointment," adding though that given the difficult economic climate "the Bank may well intervene in currency markets or cut its deposit rate before long."
Amid an international slump and especially weakness in the neighbouring eurozone, the wealthy Alpine nation acknowledged earlier this month that its economy unexpectedly stagnated in the second quarter.
SNB, which had previously forecast 2.0-percent economic growth for Switzerland in 2014, said Thursday it now expects to see the country's gross domestic product grow just 1.5 percent this year.
"The SNB expects that the global economic recovery will be weaker in the approaching quarters than previously forecast," it said.
- Exchange-rate floor vital -
In the difficult economic environment, the bank stressed the importance of keeping down the value of the Swiss franc.
"With the three-month Libor close to zero, the minimum exchange rate remains the key instrument to avoid an undesirable tightening of monetary conditions," SNB said.
It stressed that it therefore would "continue to enforce the minimum exchange rate with utmost determination," and that it was "prepared to purchase foreign currency in unlimited quantities" and if necessary to "take further measures immediately."
The J. Safra Sarasin analysis firm said the choice of phrase was important.
"This wording implies that, one, they would act in between the quarterly meetings if necessary and, two, they would also consider introducing measures like negative deposit rates," it said in a note.
The bank introduced the floor in September 2011 as a strengthening franc was creating headaches for exporters, whose margins were eroded by unfavourable exchange rates.
The Swiss franc is traditionally seen as safe haven by the markets in tough times, and investors unsettled by the eurozone debt crisis and uncertain global economic climate flocked to the currency, driving up its value.
The crisis in Ukraine has also led to intermittent spikes in the value of the franc, pushing it closer to the 1.20 limit.
In early September, it cost just 1.2045 francs to buy one euro.
"As the prospect of quantitative easing in the eurozone puts additional upward pressure on the franc, we suspect that the SNB will buy more foreign assets in the very near future," the Capital Economics analysis firm said.
The bank meanwhile maintained its inflation forecast for 2014 at 0.1 percent, but adjusted down its outlook for the coming two years.
"From mid-2015 and onwards, inflation is set to be lower," SNB said, saying it now expected 0.2-percent inflation next year instead of 0.3 percent.
For 2016, inflation is now expected to stand at 0.5 percent instead of the previous forecast of 0.9 percent.
"This is mainly due to the deterioration in the global economic outlook and slower growth in Switzerland," it explained.
"For Switzerland, the risk of deflation has thus increased again," it warned.


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