The Swiss National Bank Thursday left its minimum exchange rate of CHF 1.20 per euro unchanged and stressed it remains willing defend the cap by buying foreign currencies in unlimited quantities.
The target range for the three-month Libor will remain at 0.0%-0.25%, the bank announced during its monetary policy conference call.
The Swiss central bank once again cut its inflation outlook underlining persistent deflation risks amid the strong Franc.
“The Swiss franc is still high. The SNB stands ready to enforce the minimum exchange rate, if necessary, by buying foreign currency in unlimited quantities, and to take further measures as required,” central banks said in a statement.
The SNB’s fresh inflation forecasts see an inflation average of 0.0% (+0.2%) for 2014 and +0.4% (+0.6%) for 2015. In 2016, inflation is expected to accelerate to 1.0%. The Swiss government earlier this week had lowered its 2014 inflation forecast to 0.1% and said inflation should accelerate to 0.4% in 2015.
“Internationally declining inflation rates and the slightly stronger Swiss franc are delaying the rise of inflation into positive territory,” the SNB said. “Consequently, no inflation risks can be identified for Switzerland in the foreseeable future.”
The central bank left unchanged its economic outlook of around 2.0% growth for the current to year. Earlier this week the Swiss government trimmed its 2014 GDP forecast to 2.2% from 2.3% and affirmed its 2015 projection of 2.7%.
While the fourth quarter of 2013 had seen a deceleration in growth “economic activity should pick up again from the first quarter of 2014,” the SNB said.
Inflation projections further undershooting the central bank’s price stability target of just under 2% over the entire forecast horizon should encourage the SNB to maintain its exchange rate target to avert a deflation threats for some time.
Risks of actual large-scale forex market intervention have subsided along with the Eurozone crisis, suggesting that the SNB may remain inactive and keep its policy stance on hold. Any potential move by the ECB to impose negative interest rates on its deposit facility may still put pressure on Swiss monetary authorities.
Any such policy shifts are particularly hard to gauge at the current juncture, the Swiss monetary authority said. “The decline in inflation in the advanced economies has increased uncertainty regarding the future path of monetary policy in the major currency areas,” the SNB warned.
While the moderate global recovery had continued in the final quarter of last year, “there are still substantial risks attached to the global economic recovery,” it said.
Apart form weak inflation pressures, “concerns over the state of the euro area financial system are likely to remain high” until Europe has completed its bank health check. “In addition, bringing about a sustained improvement in public finances poses a considerable challenge for a number of advanced economies.”
Turning back to the domestic market, the SNB said that the rise in capital requirements for mortgage loans on residential property as of 30 June 2014 should “increase banks’ resilience to a possible correction of imbalances on the mortgage and real estate markets, and will counteract a further build-up of these imbalances.
The central bank affirmed that it will “continues to monitor the situation on the mortgage and real estate markets closely, and regularly reassesses the need for an adjustment of the countercyclical capital buffer.”