The Swiss National Bank decided to replace its current Libor based interest rate band with a new policy rate, citing concerns over the future of the former, and kept the overall monetary policy remained expansionary.

In the monetary policy assessment on Thursday, the SNB said it will use new policy rate in communicating the monetary policy decisions.

Accordingly, the SNB policy rate, currently at -0.75 percent, replaced the target range for the three-month Libor.

The UK financial regulator has ensured the maintenance of the Libor only until 2021, the bank pointed out. As the future of the Libor is not guaranteed, the SNB launched its new policy rate.

SNB President Thomas Jordan said the volume of money market transactions underlying the Libor has dwindled and this has also placed a question mark over the basis for its calculation.

Interest on sight deposits held by banks at the central bank currently corresponds to the SNB policy rate. The interest on sight deposits was kept unchanged at -0.75 percent.

The central bank aims to keep the Swiss franc money market rates close to the SNB policy rate.

The recent shift to a looser bias in the US and the euro-zone only strengthens the assessment that the SNB will step up interventions towards the end of this year and cut rates to -1.00 percent in mid-2020, David Oxley, an economist at Capital Economics, said.

The SNB reiterated that the Swiss franc is still highly valued and the situation on the foreign exchange market remains fragile.

"When the trade dispute between the US and China escalated again in May, the Swiss franc and the Japanese yen appreciated," Jordan said.

"Both currencies are sought after as safe havens in periods of uncertainty."

The bank repeated that the negative interest rate and the willingness to intervene in the foreign exchange market as necessary remain essential in order to keep the attractiveness of Swiss franc investments low.

Further, the bank raised its inflation forecast for 2019 to 0.6 percent from 0.3 percent projected in March. The forecast for 2020 was raised marginally to 0.7 percent from 0.6 percent.

The central bank continues to expect the to grow by around 1.5 percent in 2019. Jordan said the growth momentum is set to remain favorable in the second quarter after 2.3 percent expansion in the first three months of the year.

Regarding the global economic outlook, Jordan said the risks, mainly political uncertainty and trade tensions, remained on the downside and were more pronounced that they were at the previous policy session in March.

"An unexpectedly sharp slowdown internationally would quickly spread to Switzerland," he cautioned.

"The global decline in long-term interest rates reflects the heightened risks," Jordan added.

Elsewhere, the government said on Thursday that the Swiss economy is set to log a moderate growth this year as weakening global activity and considerable uncertainty is weighing on foreign trade and investment.



The expert group of State Secretariat for Economic Affairs upgraded the 2019 growth projection to 1.2 percent from 1.1 percent, while the outlook for 2020 was retained at 1.7 percent.

The Swiss big banks Credit Suisse and UBS have slightly improved their capital situation, despite moderate deterioration in economic and financial conditions, according to the SNB's Financial Stability Report released Thursday.

The FSR noted that imbalances in mortgage and residential real estate pose risks to financial stability. The SNB assessed that targeted measures are necessary for residential investment property lending.

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