The differences in monetary policy between the key currency regions have increased again. As expected, in December 2017 the Federal Reserve (the US central bank) raised key base interest rates for the third time in the year to a range of between 1.25 and 1.5 percent. The Fed expects that the economic conditions in 2018 will make three further interest hikes possible. It also expects the employment market to remain robust and inflation to move towards the target rate of two percent.
In comparison, the monetary policy of the Swiss National Bank (SNB), and that of the European Central Bank (ECB), are very expansive. The ECB has kept the base rate in the euro zone at the record low level of zero percent. Banks, which park money at the central bank, must continue to a pay penalty interest of 0.4 percent. The European Central Bank wants to continue its bond purchasing programme until at least September 2018; however, the scope of purchases will be halved to EUR 30 billion per month. Even though economic prospects for the euro zone are looking very positive, the ECB still thinks monetary policy impulses are necessary in order to nudge subdued inflation in the direction of the target value. According to forecasts, inflation should climb only to 1.7 percent by 2020.
In mid-December 2017, the SNB held the target range for three-month LIBOR reference interest rates at between minus 1.25 to minus 0.25 percent. Banks must continue to pay a penalty interest of 0.75 percent for their sight deposits held at the SNB. Furthermore, if necessary, the central bank remains ready to intervene on the foreign exchange market in order to prevent an upward rise in the value of the Swiss franc. With monetary policy remaining expansive, the upper target value of two percent inflation should only be reached in mid-2020. Economists are assuming that the SNB will not act before the ECB and will only raise base interest rates in the middle of 2019.