Recently, the Swiss National Bank announced its decision to leave cash rates unchanged in the negative territory of -0.75%, a decision that was in line with analysts' expectations.
The decision to keep an ultra-loose monetary policy stance was surprising given the recent inflationary pressures that the world's economy is currently facing.
The bank also updated its inflation forecasts. The inflation rate is expected to be at 0.4% this year, up from the previously reported 0.2%. In 2022 and 2023, the inflation rate is expected to rise by 0.6%. In the long term, the inflation rate is expected to be around 1%.
According to the bank's chairman, Thomas Jordan, the main reason why the bank didn't decide to abandon its ultra-loose stance is that inflation in Switzerland is low compared to the rest of the world.
“In Switzerland, interest rates and inflation remain low by international comparison,” Jordan said during a news conference. “Survey data show an expected inflation rate of around 1 percent for the long term. Against the backdrop of production capacity not yet being fully utilized and our moderate inflation forecast, our expansionary monetary policy remains appropriate.”
The bank's position implies that inflation would need to rise substantially more, to about 2%, before the bank makes the decision to increase cash rates. This is mainly linked to the fact that, unlike other currencies, the Swiss franc keeps suffering from overvaluation, which counters inflationary pressures. The appreciation of the currency is still perceived as problematic, so the bank pledged to intervene in the foreign exchange market when necessary.
Moreover, some analysts expect the SNB not to raise the interest rates until the Federal Reserve decides to do so. This implies that Switzerland will have at least a couple of more years of negative cash rates.
The economy is expected to continue recovery now that the pandemic is subduing both locally and globally. Since the beginning of the pandemic, 701,454 cases have been reported including 10,869 deaths. Around 6.09 million vaccine dosages have been already distributed among the population, while 2.34 million people, or around 27.4% of the population, are now fully vaccinated.
The Swiss GDP is expected to grow by 3.5% this year, higher than the previously reported forecast, which stood between 2.5% and 3%.
By 12:34 GMT, the Swiss franc fell against the US dollar by 0.62% to the 1.0932 level.