MNI STATE OF PLAY: SNB Keeps Policy Loose As Franc Strengthens

Interest on sight deposits held by the Swiss National Bank was kept at -0.75% Thursday, as chairman Thomas Jordan stressed the need for Switzerland to maintain an expansionary monetary policy despite other central banks’ moves towards policy normalisation.

Even following its recent nominal appreciation, the CHF remains only “highly valued”, Jordan explained, with the real effective exchange rate remaining “more or less stable over the last couple of quarters.”

Switzerland experienced a robust increase in GDP in Q3 2021, Jordan said, lifting it above its pre-crisis level for the first time. Overall growth will be around 3.5% this year, slightly more than anticipated in September, he said, before falling back to around 3% in 2022. Unemployment will continue to decline.

However Switzerland’s current growth outlook remains highly dependent on global growth, Jordan said, with the SNB’s baseline scenario predicated on the assumption that no containment measures that would additionally impair economic activity are introduced.

Inflation, which peaked at 1.5% in November this year, is expected to come in at around 0.6% for 2021, 1.0% for 2022, and 0.6% for 2023, with global supply bottlenecks and oil prices adding near-term upwards pressure that will be resolved over the medium-term.

FRANC HIGHLY-VALUED

The Swiss franc has appreciated by 3% in nominal and trade-weighted terms since September’s monetary policy assessment, and by around 6% since the beginning of the pandemic, Jordan noted.

“Nevertheless, we continue to view the Swiss franc as highly valued. Why so? The reason is inflation abroad, which is at present noticeably higher than it is in Switzerland. The nominal appreciation therefore does not entail an appreciation to the same extent in real terms. The real trade-weighted Swiss franc exchange rate – which takes into account the inflation rate differential with other countries – has hardly changed since the beginning of the pandemic," Jordan said. "There is thus no change in our assessment that the Swiss franc remains highly valued."

“At the same time, we have been able to prevent a stronger rise in inflation in Switzerland by allowing a certain amount of nominal appreciation. The nominal appreciation of the Swiss franc has countered rising prices in that it makes imports cheaper. The increase in the value of the franc in recent months has therefore contributed to the rise in prices in Switzerland being kept relatively low.”

Jordan welcomed signs of monetary policy normalisation by other global central banks, but said that in light of very low Swiss inflation an expansionary stance is still needed.