SNB Sees Downside Risks as It Keeps Crisis Policy Settings

(Bloomberg) -- The Swiss National Bank cut its inflation forecast and showed no inclination of moving off its crisis-era settings, citing the franc’s strength and mounting global risks.

Investor anxiety about Italian politics, trade tensions and Brexit has put upward pressure on the franc in recent months, dragging it further away from its April low against the euro. Highlighting those risks on Thursday, the SNB repeated its much-used phrase that the situation remains “fragile” and maintained its currency intervention threat.

SNB Sees Downside Risks as It Keeps Crisis Policy Settings

The central bank slashed its 2019 inflation forecast to 0.5 percent from 0.8 percent. While price growth will pick up the following year, the revival -- to 1 percent -- will be weaker than previously projected. Economic expansion will slow to 1.5 percent next year from about 2.5 percent this year, SNB President Thomas Jordan said in Bern.

“Risks are to the downside, as is the case with the global economy. In particular, a sharp slowdown internationally would quickly spread to Switzerland.”

Switzerland’s decision comes just hours before the European Central Bank is due to announce an end to its enormous bond-buying program. The launch of that stimulus in 2015 led the SNB to unleash a market storm by slashing rates to their current lows and scrapping its 1.20-per-euro minimum exchange rate.

The franc weakened to that level earlier this year, briefly raising the possibility of Swiss policy makers getting ahead of their euro-area counterparts with a rate rise.

But it’s since appreciated through 1.13 versus the euro and that, along with mounting risks, has dashed hopes of a preemptive SNB hike. In addition, the Swiss economy unexpectedly shrank in the third quarter.

“Given the economic and political uncertainties, there is also the risk of major and sudden movements in the exchange rate, which would significantly alter monetary conditions,” Jordan said. “We therefore continue to regard the situation on the foreign exchange market as fragile.”

While ECB policy makers are set to stop buying net new assets as of January, they’ve also committed to keeping borrowing costs on hold through the end of the summer. Jordan has emphasized the importance of maintaining an interest rate spread with the neighboring bloc. The ECB decision is due at 1:45 p.m. in Frankfurt.

©2018 Bloomberg L.P.