In this article, we will be analysing the latest monetary policy statement from the Swiss National Bank (SNB) and discussing its potential implications for the Swiss economy moving forward. We will explore the SNB's projections for inflation and economic growth, as well as the risks and uncertainties that the bank has identified in its assessment of the global economic environment. Through this analysis, we aim to provide a comprehensive understanding of the SNB's latest monetary policy decision and its potential impact on the Swiss economy.
Key Points
The Swiss National Bank (SNB) has announced that it will be tightening its monetary policy further and raising the SNB policy rate by 0.5 percentage points to 1.0%. This move is in response to increasing inflationary pressure and a further spread of inflation in the country. The SNB has indicated that it may need to make additional rate increases in the future in order to maintain price stability over the medium term. To support this effort, the SNB has also indicated that it is willing to engage in foreign exchange market activity as necessary.
The SNB's policy rate change will take effect from December 16, 2022. As part of this change, banks' sight deposits held at the SNB will be remunerated at a rate of 1.0% up to a certain threshold. Deposits above this threshold will be remunerated at a rate of 0.5%, representing a discount of 0.5 percentage points relative to the SNB policy rate. The SNB is implementing this tiered system in order to ensure that secured short-term Swiss franc money market rates are kept close to the SNB policy rate.
Inflation in Switzerland declined slightly in recent months and stood at 3.0% in November. However, it remains well above the range that the SNB considers indicative of price stability. Inflation is expected to remain elevated in the near term. The SNB's new conditional inflation forecast, which is based on the assumption of a 1.0% SNB policy rate over the entire forecast horizon, projects average annual inflation of 2.9% for 2022, 2.4% for 2023, and 1.8% for 2024. Without the SNB's policy rate increase, the inflation forecast would have been even higher over the medium term.
The SNB's baseline scenario for the global economy predicts that the current challenging situation, characterised by slowing global growth and elevated inflation in many countries, will persist for the time being. Global economic growth is expected to be weak in the coming quarters, and inflation is likely to remain high. Over the medium term, however, inflation is expected to return to more moderate levels due to increasingly tighter monetary policy in many countries. There are significant risks to this scenario, including the possibility of further deterioration in the energy situation in Europe, the risk of high inflation becoming entrenched and requiring stronger monetary policy responses abroad, and the ongoing impact of the coronavirus pandemic on the global economy.
In Switzerland, GDP grew at an annualised rate of 1.0% in the third quarter, and the country is expected to see GDP growth of around 2.0% for the year. However, weaker demand from abroad and high energy prices are expected to constrain economic activity in the coming year, leading the SNB to forecast GDP growth of around 0.5% for 2023. The SNB expects the Swiss franc to remain highly valued in the near term and has indicated that it is prepared to intervene in the foreign exchange market as necessary to counter upward pressure on the currency.
Summary
The SNB has indicated that it may need to make additional rate increases in the future, in addition to the recent 0.5% hike, in order to maintain price stability over the medium term, and is also willing to engage in foreign exchange market activity as necessary. The interest rate increase could further affect the value of the Swiss franc, which already gained almost 9% against the US Dollar between November 2022 and January 2023, and the overall performance of the Swiss economy.
It is worth noting that the SNB's monetary policy decision is being made in the context of a challenging global economic environment, characterised by slowing growth and elevated inflation in many countries. The SNB's projections for inflation and economic growth in Switzerland, as well as its assessment of the risks and uncertainties facing the global economy, paint a gloomy picture of the near term future of the economy, a recurring theme in the monetary policy statements of countries across the world over the last year.
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