The Swiss National Bank keeps its target floor of CHF 1.20 per euro

As widely expected, the SNB kept its target three-month LIBOR rate on hold at 0.0% at its quarterly monetary policy meeting today. Regarding its exchange rate policy, the central bank didn’t raise the floor set at CHF 1.20 per euro.

Expectations that this floor would be raised to 1.25 or 1.30 at today’s SNB quarterly meeting were quite widespread a few weeks ago, but had receded sharply more recently. Nevertheless, the SNB reiterated that “even at the current rate, the Swiss franc is still high” and added that it “stands ready to take further measures at any time if the economic outlook and the risk of deflation so require”.

Although we still believe this wouldn’t be such a good idea, it is still possible that the SNB will raise the floor on the euro against the franc some time next year. However, the SNB is most likely to wait a few more months before acting, and it’s worth noting that such a decision is strongly linked to future economic developments in Switzerland but also to movement of the euro against the dollar and the other major world currencies. If the Swiss franc remains stable against the euro but both fall further against the other major currencies, the Swiss economy will be able to regain quite some competitiveness.

Following the SNB statement and the news that the exchange rate floor was not raised, the euro gained some ground against the franc, moving from slightly less than CHF 1.24 per euro early this morning to slightly less than 1.23 currently. Our forecasts for the euro/Swiss franc exchange rate remain unchanged. The euro should remain relatively stable around 1.23-1.24 franc over the coming few weeks, and then rise toward some 1.30 by the end of next year.

Regarding its GDP growth forecast, the SNB kept it unchanged at 1.5%-2% for 2011 and set its initial forecast for 2012 at a weak 0.5%, perfectly in line with our own expectations. Concerning its conditional inflation forecasts, the SNB has made further downward adjustments: from 0.4% to 0.2% for 2011 and from 0.5% to 0.4% for 2013. Expectations for 2012 remained unchanged at -0.3%, slightly below our own forecasts (-0.1%).

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