Thursday, September 18, 2014

Swiss maintain franc cap, see higher deflation risk

   The Swiss National Bank (SNB) maintained its upper limit on the Swiss franc's exchange rate and the target range for three-month Libor at zero to 0.25 percent, and reduced its inflation forecast due to "the deterioration in the global economic outlook and slower growth in Switzerland."
    The SNB, which imposed a cap on the Swiss franc of 1.20 euros in September 2011, also repeated that it still views the franc's exchange rate as high and it would continue to enforce its exchange rate target "with utmost determination" and is "prepared to purchase foreign currency in unlimited quantities."
    "If necessary, it will take further measures immediately," the SNB said, concerned that rising geopolitical risks are putting upward pressure on the franc from investors seeking safe haven.
    The Swiss franc was trading at 1.208 to the euro today, up from 1.23 at the start of the year. The last time the SNB intervened in currency markets was in September 2012.
    The SNB maintained its forecast for inflation this year of 0.1 percent but cut its 2015 forecast to 0.2 percent from 0.3 percent forecast in June. For 2016 the inflation forecast was slashed to 0.5 percent from 0.9 percent.
    "For Switzerland, the risk of deflation has thus increased again," the SNB said, adding its forecast was based on three-month Libor of zero over the next three years and a weakening Swiss franc.
    The SNB was downbeat about the global economy, saying growth will be weaker in coming quarters than it had expected and it remains vulnerable to setbacks, with the possibility that geopolitical tensions may weigh on confidence.

    With Switzerland's Gross Domestic Product stagnating in the second quarter from the first, the SNB expects growth this year of just below 1.5 percent, with production capacity underutilized for longer than expected and a delayed recovery of the labor market.
    Despite slightly weaker growth in second quarter mortgage lending, the SNB said there were still no evidence of a decline in imbalances in the real estate market that had built up in recent years.



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