At its quarterly policy meeting on Thursday, the Swiss National Bank left the target range for the three-month LIBOR unchanged, between −1.25% and – 0.25%. The interest rate on sight deposits with the SNB remains at –0.75%. These rates were in line with expectations and the Swiss Franc strengthened after the announcement.
In reaction to the news, the euro dropped to 1.0945 francs after having reached a high of 1.0976. The dollar fell to 0.9666 from 0.9718 francs.
In a statement, the Swiss central bank mentioned that the Swiss franc is still overvalued despite a recent depreciation. The Bank said it will remain active if necessary in the currency markets to weaken the franc if necessary in order to protect the economy from the impact of an overvalued currency.
However, most economists expect the SNB to maintain rates until the end of the year, since the recent weakening of the Swiss franc versus the euro has reduced the pressure on the SNB to act. Ever since the removal of the EURCHF peg of 1.20 francs in January, which led to a huge drop in the euro, the pair has since rebounded from 0.9649 to reach a high of 1.1048 last week.
Despite the suspension of the SNB’s cap of 1.20 per euro, the Swiss economy unexpectedly grew in the second quarter and avoided a recession. GDP rose by 0.2% after having contracted by 0.2% in the first quarter. On an annual basis, GDP rose 1.2% in the second quarter, the same as the revised 1.2% growth seen in the previous quarter and above analysts’ forecasts of a 0.9% rise.
The SNB expects economic activity to pick up gradually in the second half of 2015 as long as the Swiss franc does not appreciate further and remains steady, this would allow exports to make a greater contribution to economic growth. For the current year, the SNB still expects real GDP growth of close to 1%.
With regards to inflation, the SNB lowered its forecasts as a result of falling oil prices. The Bank foresees deeper deflation in 2015 and 2016. For 2015, the inflation forecast was cut by 0.2% to -1.2% and for 2016, it was lowered to -0.5% from -0.4%.