SNB signals potential policy shift by raising inflation outlook

SNB signals potential policy shift by raising inflation outlook
Swiss National Bank (SNB) Chairman Thomas Jordan leaves after a news conference in Bern, Switzerland December 14, 2017. REUTERS Denis Balibouse
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By John Revill and Silke Koltrowitz

BERN (Reuters) – The Swiss National Bank expects inflation in Switzerland to exceed its target in three years – an indication of when it might exit its ultra-loose monetary policy.

The SNB kept that policy in place on Thursday, saying the Swiss franc weakened this year but remained “highly valued”.

The bank was in “no rush at all” to start normalising policy, Chairman Thomas Jordan said, even though the economy is performing well and some other central banks — notably the U.S. Federal Reserve — have started to raise interest rates.

The SNB said it expected Swiss consumer prices to rise 2.1 percent in the third quarter of 2020 – marginally higher than the bank’s goal of price stability, which it defines as prices rising by less than 2 percent.

It outlined its views hours before a meeting of the European Central Bank, which has reduced the pace of its asset purchase programme, seen as the first stage in weaning the euro zone off loose money.

The ECB meeting may debate tweaking its pledge to keep money at its current ultra-easy level, although it is likely to ultimately reaffirm its policy stance.

The Swiss central bank nudged up its short-term inflation expectations for 2017 and 2018 while leaving its 2019 view unchanged.

Rising prices, attributed to the recent weakening of the franc and higher oil prices, could lead to higher interest rates, analysts said. Rates have been frozen in negative territory for nearly three years.

Jordan said it was too early to speak of normalising SNB policy. The franc remained “highly valued”, he told a news conference, despite the currency’s losing around 7 percent in value over the last six months.

“We still have to be very prudent and there is no necessity to start at this moment the normalisation process,” Jordan said.


The SNB said risk aversion could return at any point, pushing up the franc, so its expansionary monetary policy — negative interest rates and currency market interventions where needed — remained necessary.

The SNB kept the target range for its benchmark interest rate at minus 1.25 percent to minus 0.25 percent, in line with market expectations.

It kept its negative rate of 0.75 percent on deposits held by commercial banks with the SNB, a measure to make Swiss franc less attractive to investors.

Analysts said the SNB’s rising inflation expectations could be the central bank’s long-term sign it was considering tightening monetary policy.

“An increased inflation forecast is an early signal that the SNB is looking to normalise its policy,” said Maxime Botteron, an economist at Credit Suisse, noting the SNB might have to raise rates to keep inflation under control.

“However, as the central bank continues to point at the high valuation of the franc, some more depreciation of the currency would probably be required for the SNB to raise its policy rate before the European Central Bank. That said, the probability of a rate hike in 2018 has increased after today’s meeting.”

ING Bank’s Julien Manceaux said: “The new 2020 inflation forecast indicates that the SNB is likely to be ready to follow the ECB on the rate hike path at the end of 2019, opening the door to a normalisation of its ultra-accommodative monetary policy.”

(Reporting by John Revill, editing by John Miller, Larry King)

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