UPDATE 1-Swiss National Bank sees inflation on rise, keeps policy for now

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(Adds detail of economic forecasts, analyst comment)

By John Revill

ZURICH, March 15 (Reuters) – The Swiss National Bank said it expected Swiss inflation to rise to an average of 1.9 percent in 2020, close to the central bank’s upper limit, as it kept its expansive monetary policy on hold on Thursday.

The SNB forecast Swiss inflation would hit 2.0 percent in the third quarter of 2020 and 2.2 percent in the fourth quarter – above its price stability mandate for inflation of less than 2 percent.

The forecast, which is based on an assumption of no changes to Swiss interest rates, is an early indication the central bank will have to start tightening monetary policy in the mid- to longer term.

“Because the new conditional inflation forecast still sees inflation rising above 2 percent through the course of 2020 and given the lag changes in monetary policy have on consumer prices, an increase in interest rates in June 2019 would be both appropriate and necessary,” said Martin Weder, an economist at Zuercher Kantonalbank.

The SNB remained ultra cautious in not changing its policy, and kept its target range for the three-month London Interbank Offered Rate (LIBOR) at -1.25 to -0.25 percent, as expected by every economist polled by Reuters.

The central bank also held its negative interest rate it charges on sight deposits at -0.75 percent, a measure designed to reduce the attractiveness of the Swiss franc which the SNB continued to describe as “highly valued”.

“The situation in the foreign exchange market is still fragile and monetary conditions may change rapidly,” the SNB said in a statement.

“The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential.”

The SNB also said it expected inflation of 0.6 percent in 2018, down from its December forecast of 0.7 percent. For 2019 it expects inflation of 0.9 percent, down from its previous view of 1.1 percent. The SNB said it expected the export-led Swiss economy to grow around 2 percent in 2018, the same level as its December forecast.

The figure was weaker than the current Swiss government forecast for growth of 2.3 percent this year, but above Switzerland’s long-term average growth of 1.8 percent.

Reporting by John Revill; Editing by Michael Shields

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