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Swiss Central Bank Retains Key Rates, Adjusts Basis For Sight Deposit Rate

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The Swiss National Bank on Thursday decided to leave its key interest rates unchanged on Thursday, but adjusted the basis for calculating negative rate on sight deposits.

The central bank kept its new SNB policy rate and interest on sight deposits at the central bank at -0.75 percent.

The bank reiterated that it is willing to intervene in the foreign exchange market as necessary, after taking into account the currency situation.

The bank repeated that the Swiss franc is highly valued and the situation on the foreign exchange market is still fragile.

Negative interest and the willingness to intervene are important in order to counteract the attractiveness of Swiss franc investments and thus ease pressure on the currency, the bank said.

Adjusting the basis for calculating rates on sight deposit, the SNB said the negative interest will continue to be charged on the portion of banks' sight deposits which exceeds a certain exemption threshold.

The exemption threshold was raised to 25 percent from 20 percent.

The adjustment raised the exemption threshold for the banking system and reduced negative interest income for the SNB. The new exemption threshold calculation comes into effect on November 1, 2019.

David Oxley, an economist at Capital Economics, said he suspects that the increase in the threshold limit is in preparation for a future rate cut if the franc continues to appreciate.

Indeed, the economist estimated that the rise in the exemption threshold would offset the impact on banks from an additional 25 basis point cut.

Further, the bank forecast economic growth of between 0.5 percent and 1 percent for 2019 as a whole, compared to around 1.5 percent in June.

Early this week, the Swiss government downgraded its growth outlook for this year to 0.8 percent from 1.2 percent predicted in June. The outlook for 2020 was retained at 1.7 percent.

The central bank downgraded its inflation forecast citing weak growth, inflation prospects abroad and the stronger Swiss franc.

Inflation is seen at 0.4 percent this year instead of 0.6 percent. For 2020, SNB projected 0.2 percent inflation versus 0.7 percent estimated previously. The rate is forecast to rise to 0.6 percent in 2021.

On the housing market, the SNB said imbalances persist on the mortgage and real estate markets. The bank noted the risk of a correction in the housing segment.

The bank vowed to monitor developments on the mortgage and real estate markets closely and regularly reassess the need for an adjustment of the countercyclical capital buffer.

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