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Swiss National Bank can make monetary policy even looser

Swiss National Bank can make monetary policy even looser

BERN: The Swiss National Bank (SNB) can further relax already ultra-loose monetary policy and take its interest rates deeper into negative territory, enlarged governing board member Martin Schlegel said on Monday.

The central bank charges a rate of -0.75 percent on cash it holds for commercial banks over a certain limit, one of its tools to combat the rise of the Swiss franc and maintain price stability in the country.

It has also intervened in the currency markets to stem the rise in the safe-haven franc, which has risen in recent days to its highest level in 20 months against the euro, creating a headache for the export-reliant economy.

The SNB drastically cut back its foreign currency purchases last year, while the negative interest rates have come under fire from pension funds and banks for reducing their returns.

Despite this, the SNB still has room to loosen monetary policy further, Schlegel said, in response to comments by the International Monetary Fund that its leeway had been crimped by low interest rates offered by other central banks.

That “means we could lower the negative interest rates, we still could intervene in the FX market if necessary”, Schlegel told a news conference in Bern.

“We have room on both instruments. They are our policy pillars and remain absolutely essential at the moment,” he said.

As a member of the SNB’s enlarged governing board, Schlegel is not responsible for setting policy, but is involved in the strategic and operational management of the bank.

SNB governing board member Andrea Maechler said last week that the bank remained committed to its expansive policy path.

In its annual review of Switzerland, the IMF said the SNB had “somewhat less room than in the past” when pursuing its goal of combating inflation and deflation.

“If needed, moving further into negative interest rate territory remains feasible to address persistent low inflation,” the IMF said.

IMF Mission Chief Rachel van Elkan declined to say how far the SNB should take rates lower to ward off investor appetite for the franc. Negative interest rates had proved their worth, while concerns they would lead to problems like money hoarding had not materialised, she said.

“When the rates were first introduced, there was considerable concerns about what might happen. Perhaps we were all crying wolf at that time. I think the situation has proven to be efficient and effective,” van Elkan told reporters.

“How much further one has to go, it is never knowable in advance. Softly, softly would be a good advice, and keep one’s powder dry to some extent, as well.”

Currency market interventions were better suited to large short-term shocks, while lower interest rates were better to deal with the long-term pressures, van Elkan said.

In its annual review the IMF forecast Switzerland’s economic growth to slow to 1.1 percent this year, from 2.5 percent last year, before a moderate recovery to 1.5 percent in 2020.

The IMF cited rising trade tensions and uncertainties in Europe like Brexit as possible risks for Switzerland, according to a government summary of the IMF’s annual evaluation.

The figures compared with the latest government forecast for a 1.1 percent expansion this year and 1.7 percent for 2020.