(RTTNews) - Thursday, the Swiss central bank retained its key interest rate and revised its growth outlook for 2009 after economic conditions improved in the third quarter compared to the second. In addition, the bank decided to continue its unconventional policy measures to ease the strength of Swiss franc.

The Swiss National Bank left its three-month libor target range unchanged at 0%-0.75% as expected. In effect, the bank kept its key interest rate unchanged at 0.25% for the second rate-setting session in a row.

“Despite the recent increase in the number of encouraging economic signs, uncertainty as to future developments remains considerable,” the central bank said in a statement. “In these circumstances, the SNB is opting for caution and retaining its monetary policy unchanged.”

Repeating the statement made in the June session, the central bank said it will continue to provide the economy with a generous supply of liquidity and, if necessary, to purchase Swiss franc bonds with a view to reducing risk premia on long-term debt instruments issued by private sector borrowers.

Further, the bank revised its economic outlook for 2009 citing improvements in the global economy and at home. It now expects Switzerland’s economy to shrink between 1.5% and 2% this year. That compares with a June prediction for a contraction between 2.5% and 3%.

But, the SNB said growth is likely to pick up again gradually during the months ahead.

Switzerland’s gross domestic product fell 0.3% sequentially in the second quarter after a 0.9% decline in the first three months of the year. The economy shrunk for the fourth straight quarter.

The strong franc played the key role in leading the economy into a recession. It also made imports cheaper, triggering deflationary risks. Year-on-year, producer and import prices were down 5.5% in August with the pace of decline slowing from 6.1% in July.

In March, the central bank started buying foreign currencies and corporate bonds to prevent further appreciation of the franc. The currency appreciated strongly amid the global crisis.

Suggesting that the monetary policy measures taken in March were effective, the Swiss franc has been stable in trade-weighted terms. It is also stable against the euro. Citing the persisting uncertainty, the central bank said it will continue to act decisively to prevent any strengthening in the franc against the euro.

Moreover, the SNB maintained its inflation forecast for 2009, while revising the outlook for 2010 and 2011. Inflation would be negative 0.5% this year and is expected to rise to 0.6% in 2010 and 0.9% in 2011, the bank said. In June, the it had said inflation would be at 0.4% in 2010 and may ease to 0.3% in 2011.

The bank also noted that this inflation forecast is associated with major risks. It warned that the recovery anticipated in the global economy may fail to materialize. Moreover, although the financial industry is well into the process of recovery, another deterioration cannot be entirely ruled out. “A risk of deflation therefore remains.”

Consequently, an immediate tightening of monetary conditions is not necessary, the SNB said. However, the inflation forecast shows that the expansionary monetary policy cannot be maintained indefinitely without compromising medium and long-term price stability, the bank noted.

In August, Swiss consumer price index fell 0.8% year-on-year after falling 1.2% in July. Consumer prices have been falling since March 2009.

Moreover, the central bank said Switzerland’s monetary conditions remain extremely relaxed and risk premia on the capital market have dropped. A rise seen in mortgage loans in July confirms that monetary conditions are normalizing.

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Posted in Categories: Economy, Eurozone, Forex, Releases, Switzerland, USA.

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