On Tuesday, the Swiss Federal Government’s Expert Group released its economic forecast for the year. In the statement, the officials said that they expect the economy to grow by 2.4%, which was in line with the previous projections. This growth will be attributed to the global demand for Swiss products and increased internal demand. In the coming year, the group announced that the global demand was likely to abate leading the economy to grow by 2.0%. This slow growth will start in the final quarter of the year. The group was also concerned about the ongoing trade dispute between the United States and its key partners.
Today, the Swiss National Bank monetary policy committee met and released their interest rate decision. As expected, the officials left the base lending rate at negative 0.75%. In the accompanying statement, the officials said:
‘Interest on sight deposits at the SNB remains at −0.75% and the target range for the three-month Libor is unchanged at between −1.25% and −0.25%. The SNB will remain active in the foreign exchange market as necessary, while taking the overall currency situation into consideration.’
This means that the period of ultralow interest rates will continue in the foreseeable future. The officials believe that a weaker Swiss franc is ideal for a country that depends mostly on exports. A low currency leads to increased demand for its products. Presently, they believe that the currency is highly valued against the peer currencies.
In the statement, the officials raised their inflation target for the year. They raised the inflation target to 0.9% from the previous forecast of 0.6%. For the coming year, the officials believe that the inflation will remain at 0.9% and in 2020, the officials expect it to climb to 1.9%. Libor is expected to remain at negative 0.75%. The current state of inflation is attributed to higher oil prices, which have surged by more than 10% this year. Nonetheless, the officials were optimistic about the pace of the Swiss economy, which is higher than expected.
In the statement, the officials remained concerned about the protectionist tendencies emerging in the developed countries. In recent months, the United States has moved to protect its steel and aluminum industry by imposing huge tariffs on steel and aluminum imports. They have also initiated tariffs on China, which is one of its largest trading partners. They were also concerned about the housing market which has seen house prices moving higher. They believe that the price could experience a correction which could have devastating to the entire market.
The USD/CHF pair remained at elevated levels as the divergence between the Fed and the SNB continues. In a statement yesterday, the Fed chair said that there was a room for more interest rates hikes in the near future. In last week’s meeting, he reiterated that there was a possibility for two more hikes this year. This makes owning the dollar more viable than owning the franc. However, as the world seems headed for a trade war, there is a likelihood that traders will buy the francs, which are viewed as a safe haven.