SNB Sees Inflation Breaching Goal But Won't Rush to Raise Rates

(Bloomberg) -- The Swiss National Bank said inflation will breach its goal in late 2020 thanks to the franc’s depreciation, but argued even talking about normalizing policy would be premature.

The forecast creates a challenge for the central bank, as it’s wary of taking any aggressive steps that could attract investor inflows and reverse the currency’s direction. On Thursday, policy makers kept the deposit rate at a rock-bottom minus 0.75 percent and said they’ll intervene in currency markets if needed. While noting the franc’s move, they added that it’s still highly valued and loose policy remains the right stance for now.

The latest forecasts see consumer-price growth accelerating to 2.1 percent in the third quarter of 2020. The SNB aims to keep price gains below 2 percent. Still, SNB President Thomas Jordan said there is “no rush at all” to normalize monetary policy.

“It’s still early, very early, to talk about normalization at the Swiss National Bank,” he said at a press conference in Bern. “Inflation is probably lower than what the conditional inflation curve is showing. There’s no risk of inflation, also inflation expectations are very well anchored at a much lower level.”

A Bloomberg survey of economists this week predicted the SNB wouldn’t raise interest rates until the final quarter of 2019, though the new projections raise the possibility of an earlier move.

“This is a first cautious step to prepare markets for monetary-policy normalization,” said Nadia Gharbi, an economist at Banque Pictet & Cie. in Geneva. “We expect a window of opportunity for a first SNB rate hike to open in the fourth quarter of 2018.”

While the franc’s 8 percent drop against the euro this year is boosting economic momentum and once-anemic price growth, Jordan said he was concerned about any steps that might entice investors to pile back into the currency and fuel a rally.

The Swiss currency weakened, depreciating 0.3 percent versus the euro to 1.16872 at 11:50 a.m. in Zurich. It also fell 0.3 percent against the dollar, its first decline in five days.

Super Thursday

The SNB announcement comes amid a bevy of central bank decisions -- kicked off by the Federal Reserve’s interest rate hike on Wednesday and which continue with the Bank of England and the European Central Bank among others on Thursday.

Norway’s central bank signaled it may start raising interest rates earlier than previously indicated, after a slump in the krone provided a path out of years of stimulus. The bank now sees a gradual increase in rates after the autumn of next year.

Rate setters are faced with a quickening of global growth that may finally increase price pressures and allow them to move off the ultra-loose policies in place for the past years.

The SNB has already responded to the franc’s decline, tweaking its language in September to say the move had helped curb its “significant overvaluation,” a sentiment reiterated on Thursday.

Hands Tied

Still, the central bank, which used a 1.20 minimum exchange rate between 2011 and 2015 to fend off haven inflows amid the euro-area debt crisis, effectively has its hands tied on policy until the ECB raises interest rates. Investors and economists predict that won’t happen before mid-2019.

“While there is indeed no urgency to raise rates as the differential with the eurozone will most likely not widen any time soon, I still think that this forecast is another step to prepare financial markets for policy normalization,” Credit Suisse economist Maxime Botteron said.

--With assistance from Paul Gordon Joel Rinneby Joshua Robinson Carolynn Look Piotr Skolimowski Alessandro Speciale Brian Swint and Anooja Debnath

To contact the reporters on this story: Zoe Schneeweiss in Zurich at zschneeweiss@bloomberg.net, Catherine Bosley in Bern at cbosley1@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Paul Gordon, Jan Dahinten

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