The SNB left unchanged the target range for the three month Libor at 2.25 - 3.25% for the second consecutive time (chart 1).
It was noted at the news conference that the impact of the crisis in the US real estate market is worsening. Despite its substantial international integration, Switzerland economy is slightly affected by slower growth in its main export markets. In the fourth quarter, Switzerland GDP growth exceeded expectations and was up by 4.2%, compared to the same period of 2006. Therefore, economic growth reached 3.1%, which is notably higher its long term average. The main source of robust economic activity is domestic demand, which is increasing thanks to the reduction of unemployment rate.
However, current conditions of financial markets and economic outlook of developed countries forced SNB to revise and to lower forecasted rate of GDP. In particular, the expected GDP growth rate is from 1.5% to 2% in 2008. This expectation is probably based on the following factors. First of all “freeze” Subprime and Alt-A mortgage backed bonds market and turbulence in the financial markets will have dampening effect on the financial sector of Switzerland and consequently on the country’s economy. Furthermore, the deceleration of the US, Euro Area and UK economic growth, as well as Swiss franc appreciation will have additional negative impact on Switzerland export.
The SNB upgraded inflation perspective (chart 2). The highest inflation rate will be expected in the first quarter of this year, which will be achieved due to sharp increase in oil prices at the beginning of this year. Inflation will probably decelerate to 1.8% in the second half of 2008. The CPI rate will be even lower in 2009, which, in fact, has caused this decision. These expectations are based upon the fact that the crisis in the US real estate market will have a negative influence on world economy, and labor migration from emerging markets will increase. In short term the main sources of inflation acceleration should be the delayed effect of the weak Swiss franc against Euro, which will increase import prices, and will probably raise energy and agricultural prices. The SNB expected inflation rate is 2% in 2008, which is almost 0.3% higher from the prior level.
SNB was forced to change current monetary policy due to high dependence of economy on financial sector, the share of which is exceeding 15% of GDP, and deceleration of the US economic growth. Receiving 6bln USD from the US Fed to cover short term liquidity deficit demonstrated once more the concerns of the central bank related to the developments in financial markets. The amount of the last deal executed in December 2007 was 4bln USD. However, in our opinion, this deal has a psychological nature and it can easily be described as “a drop in the ocean”, since only the UBS (largest bank by assets in the Euro Area and Switzerland) losses have already exceeded 19bln USD.
In this connection we think that the target range for the three month Libor will be lowered at least by 25 basis points.
SWITZERLAND ECONOMIC INDICATORS
Chart 1
Source: Bloomberg
Chart 2
Source: National Bank of Switzerland
