SNB Revises Inflation Forecast Upward; Has No Plans to Change its Policy

Inflation Forecast Revised Upward

                Swiss National Bank has followed the footsteps of the US Federal Reserve and the European Central Bank in revising inflation forecasts. Now it foresees inflation at 0.4 percent in 2021, whereas the previous forecast was at 0.2%. In 2022 and 2023 inflation is expected to hit 0.6% level. According to experts, with similar inflation forecasts for 2022 and 2023, a current surge in inflation seems just temporary. Additionally, the GDP forecast was revised upward to 3.5% for 2021 from around 2.5%-3% previously foreseen. The European and US counterparts of the SNB have both raised its inflation forecast last week as there is observed a spike in prices globally. Also, the FED has signalled gently that it might make two hikes of interest rates in 2023.

No Change of Policy to stabilize the Swiss Franc

                Higher inflation does not mean that change of monetary policy is on cards for the SNB. The governor of the Swiss central bank, Thomas Jordan, has told CNBC, that revised inflation forecast is not good reason to change course: “In Switzerland, interest rates and inflation remain low by international comparison”, while adding: “Survey data show an expected inflation rate of around 1% for the long term.” Indeed, the inflation of even 0.6% in next two-three years is not high while comparing to inflation in other countries. For instance, the ECB expects annual inflation in the eurozone at the level of 1.9% this year and 1.5% next year. With the inflation believed to be firmly anchored at 1% long term, the SNB sees no reason to change its policy: “Against the backdrop of production capacity not yet being fully utilised and our moderate inflation forecast, our expansionary monetary policy remains appropriate”, stated Jordan. Experts are also confident that no change in interest rates will be introduced soon, at least as long as the FED does not make rates hike. This means still a few more years with a record low, negative interest rates of minus 0.75%.

Strong Swiss Franc Exchange Rate

                Apart from sticking to negative interest rates, the SNB still pledges to make interventions when necessary. Interventions on the foreign exchange rate market are made heavily by the bank in order to keep CHF from getting overvalued and secure a good Euro exchange rate for the swiss export industry. The SNB believes CHF exchange rate is still too strong, even though the currency has weakened a bit this year. The Swiss franc price was high last year due to the COVID-19 crisis, and many investors were seeking safe-haven assets and being eager to buy Swiss francs. At the beginning of the year CHF got weaker, but recently, as many central banks vowed to keep low interest rates, its exchange rate strengthened again, trading around 1.092 versus euro.