MNI STATE OF PLAY: SNB Ups Outlook, Inflation Still Seen Low

The Swiss National Bank revised growth and consumer price forecasts slightly higher on Thursday, but said the rate of price increases would remain well below target over its forecast horizon, and reaffirmed its willingness to intervene in currency markets to counter any upward pressure on the "highly valued" Swiss franc.

Supply bottlenecks, plus higher prices for oil products and tourism-related services, pushed the 2021 inflation forecast to 0.4%, with 0.6% predicted in both 2022 and 2023, compared with the 0.2%, 0.4% and 0.6% forecast in March.

Short-term inflation expectations are now rising globally, with upward pressure on prices likely to continue over coming months, but such effects are likely to abate within a few quarters' time, Chairman Thomas Jordan said.

The franc, which has been trading around its strongest level in four months at about 1.09 to the euro, remains "highly valued," said the SNB, which kept the policy rate on sight deposits unchanged at -0.75% and "remains willing to intervene in the foreign exchange market as necessary, while taking the overall currency situation into consideration."

FRANC DAMPENS INFLATION

The SNB dropped its commitment to intervene "more strongly" in FX markets in March.

"The SNB's expansionary monetary policy provides favourable financing conditions, contributes to an appropriate supply of credit and liquidity to the economy, and counters upward pressure on the Swiss franc," it said in Thursday's monetary policy assessment.

While any return to policy normalisation at a global level would be positive for Switzerland, Swiss inflation would need to run above the SNB's price stability target of less than 2% for two to three years before a significant adjustment in policy were justified, Jordan said.

The franc was one of the key factors keeping inflation down, he said, alongside the output gap, incomplete capacity utilisation, and well-anchored inflation expectations.

The fact that inflation expectations have risen in some countries "primarily reflects a return to normal," he added, "given that long-term inflation expectations had fallen significantly in many countries."

The SNB now anticipates GDP growth of around 3.5% for 2021, compared with the 2.5-3% expected in March, with "risks on the upside and downside alike." The after-effects of the pandemic are set to weigh on both demand and production capacity for "some time yet."

GDP fell again in the first quarter of 2021 in many countries, and remains significantly below pre-crisis levels, Jordan said. At the same time, Switzerland and others have made progress in their vaccination efforts, and Swiss GDP is expected to return to its pre-crisis level by the middle of the year.

The SNB's baseline scenario is that major advanced economies will ease containment measures further through to the summer, resulting in "strong" growth in both Q2 and Q3 2021 and signs of labour market improvement.