-Cautious SNB cuts inflation outlook, keeps rates on hold

(Removes superfluous word in last paragraph.)

* SNB cuts inflation outlook for 2019 and 2020

* Economists say rate hikes on hold for most of next year

* SNB says franc remains highly valued, FX market fragile

By John Revill

ZURICH, Sept 20 (Reuters) - The Swiss National Bank lowered its inflation forecasts on Thursday, indicating the central bank is likely to maintain its ultra-loose monetary policy well into next year or later.

The central bank kept its negative interest rates policy on hold, citing a "fragile" foreign exchange market and rising protectionism, as unanimously forecast by 36 economists polled by Reuters.

But the SNB now sees consumer prices rising 1.2 percent in 2020, down from a previous view of 1.6 percent. The SNB defines its price stability goal as prices rising below 2 percent.

It cut its inflation forecast for 2019 by 10 basis points to 0.8 percent.

Analysts look to the SNB's inflation forecasts for indications on when Chairman Thomas Jordan will change the bank's policy, which has remained frozen since January 2015.

"The central bank has substantially lowered its long-term inflation forecast, thereby suggesting that it is barely considering raising its policy rate over the next three years," said Maxime Botteron, an economist at Credit Suisse.

Economists had previously expected the SNB to start raising rates from -0.75 percent when the European Central Bank starts normalising its own policy, which is forecast to happen next September.

The SNB is being cautious because it believes risks will grow in the coming months, which could drive safe-haven flows into the franc, said Charlotte de Montpellier, an economist at ING Bank.

The SNB has fought long and hard to limit the franc's rise, which weighs on Switzerland's export-reliant economy.

"This downward revision of the inflation forecast signals that the SNB will wait a long time to change its monetary policy," de Montpellier said.

"It means that there is absolutely no chance the SNB will start raising interest rates before the ECB starts raising its own rate," she said. "It is possible that the first rate increase will be postponed towards 2020."

The franc eased against the euro after the decision. Futures markets were not pricing in any Swiss rate hike until a year from now.

The SNB revised downwards its inflation forecast to reflect how the stronger franc has made imports cheaper. In recent weeks the franc has risen to its highest against the euro since July 2017, driven by concerns about Italy's budget and rising trade tensions around the world.

The SNB repeated its readiness to intervene in the markets to block the currency's gains.

The SNB also kept its description of the currency as "highly valued", adding risks remained to its generally positive assessment of the Swiss and global economies.

Text of the SNB statement: (Reporting by John Revill; editing by Brenna Hughes Neghaiwi and Michael Shields)

First Published: 2018-09-20 09:54:48
Updated 2018-09-20 12:02:04

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