SNB Keeps Target Rate Unchanged, Intervention To Take Place As Needed

As widely anticipated, the SNB decided to leave its 3-month LIBOR target range unchanged at 0-0.75% and to continue buying bonds as well as acting against Swiss Franc's appreciation.

At the accompanying statement, SNB stated although there have been signs of improvements in economy, global environment remains 'unfavorable and further economic deterioration cannot be ruled out'. Concerning economic forecasts, the central bank stayed unchanged at its GDP growth forecasts of -2.5% to -3% for 2009 while annual average inflation will drop to around -0.5% this year. In 2010 and 2010, inflation will become slightly positive, amounting to +0.4% and 0.3% respectively. SNB reiterated that the nation's economic condition is still difficult and the 'the risk of deflation has abated, but still remains a concern'.

Apart from keeping the range of policy rate unchanged with the aim of bringing LIBOR down to around 0.25%, the central will continue to provide the market with ample liquidity via purchase of Swiss Franc bonds. Once again, SNB Chairman Jean-Pierre Roth stated the central bank will 'will take firm action to prevent an appreciation of the Swiss franc against the euro'.

Movement of EURCHF has been volatile today. Shortly after the announcement, Franc surged to as high as 1.513 against the Euro as the central bank's comment hinted possible invention. However, recovery was seen and pushed Franc to 1.502 against the euro.

SNB announced that it would intervene to prevent CHF to appreciate against the euro at the March policy meeting and since then EURCHF has been trading around 1.5 which is implicitly a floor for the currency pair. We believe this will continue to be an 'informal' floor for the currency pair.

While the SNB continues to maintain an expansionary monetary policy, the low policy rate has not completely passed to the public yet. Banks are still lending at a higher rate than the SNB wants and the spread between the SNB target rate and the 3-month LIBOR averages 15.2 bps since SNB's decision on March 12. This indicated reluctance of banks to lend money.