The SNB revised down its growth and inflation forecasts at the September meeting global economic slowdown and strength in Swiss franc are beginning to erode Swiss growth. In the meeting statement, the central bank showed its commitment in defending EURCHF at 1.20 or above. The SNB pledged it has 'utmost determination' and may take 'further measures' to enforce the minimum exchange rate.
Despite healthy growth in the first half, Swiss economic growth is expected to halt in the second half of the year. The SNB forecasts growth will reach 1.5-2% for 2011, down from +% projected previously, mainly driven by strength in the 1H11. The central bank warned of a threat of recession should there be no imposition of measures to curb currency appreciation.
As far as inflation in concerned, the SNB believed that 'in the foreseeable future, there is no risk of inflation in Switzerland'. On the contrary, there are 'downside risks for price stability, should the Swiss franc not weaken further'. The central bank trimmed the country's inflation outlook. Based on Libor at 0.0%, inflation rate will ease to +0.4% in 2011, down from +0.9% estimated previously. CPI will fall to -0.3% in 2012 (previous: +1.0%) before climbing higher to +0.5% in 2013 (previous: +1.7%).
As the SNB continues to intervene the FX market, we expect it will concentrate on euro buying initially. However, as the central bank seeks to diversify its reserves, other currencies including US dollar, the pound, Japanese yen and Canadian dollar will be purchased. If SNB's intervention in 1H11 serves as a guide, Canadian dollar will be bought the most while Australian dollar and Swedish Krona the least.
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