SNB Pauses Again. Raises Growth And Inflation Forecasts

As widely expected, the SNB left the 3-month Libor target at 0-0.75%. Although the growth momentum has remained robust, inflation pressures have been mild. Moreover, strength in Swiss franc has offset the effects of accommodative monetary measures, hence reducing the needs for tightening. Policymakers also raised growth and inflation forecasts higher than 3 months ago.

The central bank appeared to be optimistic towards the economic outlook. It stated that global economic developments, especially in the US and Asia, have been 'more dynamic than the SNB had expected in December' although debt problems in Europe, geopolitical tensions, high oil prices and 'the consequences of the earthquake catastrophe in Japan' may have dampening effects to the recovery.

Domestically, the Swiss economy also grew more vigorously than previously expected in 4Q10. Business sentiments are positive and suggest 'favorable developments' in the economy. These factors may be offset by 'stagnating goods exports', resulting in slowdown in growth during the course of the year.

Against the backdrop of a stronger growth profile, the SNB raised its forecasts for GDP growth this year to +2% from +1.5% estimated in December. Concerning inflation, the assessment has not changed significantly but CPI may increase by +0.8% in 2011 then by +1.1% in 2012. The forecasts were upgraded from +0.4% and +1.0% respectively.

At the end of the statement, the SNB reiterated that the current expansionary monetary policy 'cannot be maintained over the entire forecast horizon without compromising price stability in the longer- term'. For now, we continue to expect the central bank to begin tightening in 3Q11