By Alice Baghdjian
ZURICH (Reuters) - Switzerland slashed its forecasts for growth and inflation this year after ditching a cap on the Swiss franc two months ago, a move that sent the currency surging and dealt a blow to the export-reliant economy.
The Swiss National Bank held steady on its negative interest rate of 0.75 percent for some cash deposits and its target range for three-month inter-bank rates, but said it would remain active in foreign exchange markets to weaken what it sees as a "significantly overvalued" franc.
The government now sees growth in Switzerland this year at 0.9 percent, down from a previous forecast of 2.1 percent. The SNB made a similar forecast.
Capacity utilisation will weaken and unemployment will rise, the SNB cautioned, although it expected a recovery elsewhere to buoy Swiss prospects.
The SNB slashed its forecasts for inflation as a result of abandoning the cap, predicting price falls of 1.1 percent for this year against a fall of 0.1 percent previously.
Next year, the SNB predicts -0.5 percent inflation compared to +0.3 percent previously. It now does not see prices rising again until 2017, when it forecasts inflation of 0.4 percent, provided interest rates hold steady and the franc weakens.
The SNB said it would continue to take account of the strong franc and its potential effect on inflation and economic developments in steering monetary policy.
"It will therefore remain active in the foreign exchange market, as necessary, in order to influence monetary conditions," the SNB said in a statement.
CAP ABANDONED
The SNB abandoned its formal cap on the value of the Swiss franc in January faced with the prospect of further easing from the European Central Bank, sending the currency crashing through its 1.20 per euro limit. It now stands at around 1.06 francs to the euro (EURCHF=).
On Thursday, the SNB said it would keep charging 0.75 percent to hold some cash deposits, and that it would not make any more exceptions to the levy, which is being contested by Swiss pension and other funds.
It also kept its target range for the three-month Libor rate at -1.25 to -0.25 percent, as analysts polled by Reuters had expected.
The SNB is battling to deter investors from piling into the safe-haven franc after the European Central Bank started printing euros.
Switzerland is in a similar position to Sweden, which yesterday cut its key repo rate further into negative territory and expanded its bond purchases, saying it was ready to take more measures as a stronger crown threatened to snuff out a pickup in inflation.
The effects of ditching the cap are already being felt in Switzerland, where firms are shortening working hours, cutting hundreds of jobs, and lowering pay to cut their costs.
Earlier on Thursday, data showed Swiss exports were down by an annual rate 3.9 percent last month, with sales of drugs and pharmaceutical ingredients, machinery and electronic equipment hit hard.from
The Swiss government also cut its growth forecast for next year, to 1.8 percent from 2.4 percent previously.