SNB Revised Up Growth and Inflation Forecasts While Leaving Monetary Policy Unchanged

As expected, the SNB left the 3-month LIBOR target range unchanged at 0.00-0.75% and intended to keep the lower part of the target range at around 0.25%. The SNB also reiterated the stance to act 'decisively to prevent an excessive appreciation of the Swiss franc against the euro'. In light of recent economic recovery, the central bank also revised up its real GDP growth and inflation forecasts.

In the accompanying statement, the SNB said that 'the signs of an economic recovery are becoming more tangible. The improvement is beginning to assist the Swiss export sector, while the domestic sector is performing well' while noting that 'the revival remains fragile and is associated with uncertainties'.

The SNB expects real GDP will grow +1.5% y/y in 2010 from 'between 0.5-1%' in December's projection. Moreover, inflation will increase by +0.7% y/y (December: +0.5%) and then by +0.9% y/y (December: +1%), respectively in 2010 and 2011. What's more, the SNB noted inflation will reach +2.75% in 4Q12, indicating 'current expansionary monetary policy cannot be maintained throughout the entire forecast horizon without compromising medium and long-term price stability'.

Concerning currency intervention, the SNB restated it would prevent excessive appreciation of the Swiss franc against the euro as 'an appreciation of this kind would result in an undesired tightening of monetary conditions'. The pledge on intervention has appeared in SNB statement since March 2009 but the central bank has become more relaxed in allowing the franc to rise in recent months.

Swiss franc plunged to 1.068 and 1.4616 against the dollar and the euro after the announcement amid worries over intervention.

Since December 2009, the SNB has started draining excessive liquidity it provided to the market during global recession last year. In December, the central bank announced to stop buying corporate bonds and said it would prevent 'excessive appreciation' in Swiss franc. Monetary base has declined as a result. In January, the annual growth rate of M2 attained +16.5% or half the rate recorded just three months ago, while the growth rate of M3 was +6.1% as compared to +7.9% in November. That said further reduction is needed. While the central bank did not mention, we expect it will implement operations to raise the 1-week repos, which currently stays at 0.05%, in coming months.