A man walks past the Swiss National Bank building in Zurich. The SNB toughened its stance yesterday on defending a cap on the franc which has come under pressure from recent appreciation in the currency, but stopped short of announcing further measures for now.
Reuters/Zurich
The Swiss National Bank (SNB) toughened its stance yesterday on defending a cap on the franc which has come under pressure from recent appreciation in the currency, but stopped short of announcing further measures for now.
In a statement that also flagged deflation risks and slower growth, the central bank said it would make unlimited currency interventions and stood ready to take more steps “immediately” if needed to defend the three-year-old cap at 1.20 per euro.
The Swiss franc has strengthened towards that threshold in recent weeks, hitting near two-year highs earlier this month. That has fanned speculation about whether the central bank might take action – such as interventions or negative rates – to stem the currency’s rise.
The franc rose to a one-week high against the single currency after Thursday’s statement, as the SNB disappointed market expectations for negative rates.
Economists noted the unexpectedly dovish tone and urgency of the statement.
“The fact that they’ve added the word “immediately” implies that they could act in between their official statements. They don’t have to wait until December,” said Karsten Junius, chief economist at J Safra Sarasin.
The European Central Bank’s unexpected interest rate cut two weeks ago and its new schemes to pump cash into the eurozone economy have intensified pressure on the SNB’s minimum exchange rate, introduced in September 2011 when a soaring franc threatened to choke off inflation and hurt the Swiss economy.
Investors are watching to see if the ECB rolls out more aggressive easing to stimulate the eurozone’s economy, as this could weaken the euro further in coming months, pushing up the Swiss franc.
The SNB is likely to wait to see if its verbal interventions do the trick in holding the minimum exchange rate before resorting to any further action, said Bantleon Bank economist Daniel Hartmann.
“Should this not be the case, the SNB won’t shrink from introducing negative interest rates,” Hartmann said.
In Switzerland, negative rates would probably involve a charge on so-called sight deposits, or the cash commercial banks hold at the SNB.
While the central bank has said it does not rule out the use of negative interest rates, it has stressed it has a broad monetary policy arsenal at hand to combat any franc strength.
The SNB could also intervene in the foreign exchange market, selling francs to cheapen the currency. It used this method in 2012, injecting billions of francs into the market and swelling its balance sheet.
Since then, the Swiss National Bank has not intervened in foreign exchange markets to defend the cap, its chairman Thomas Jordan told Swiss broadcaster SRF yesterday.
The SNB has said the last time it intervened was two years ago.
Bantleon’s Hartmann said the SNB might prefer imposing fees on franc deposits to extensive currency interventions because its balance sheet of around 500bn Swiss francs is still so bloated from the last round of currency interventions.
“We think that it’s possible to see sporadic foreign currency purchases but in the long-term perspective we don’t see the sort of interventions there were in 2012,” said Credit Suisse economist Maxime Botteron.
The residual threat of deflation resurfaced in yesterday’s statement as the SNB struck a more downbeat note on the health of the Swiss economy.
“The risk of deflation in Switzerland has increased,” the SNB said, adding inflation was set to be lower from mid-2015 onwards. Switzerland’s economy unexpectedly stalled in the second quarter as trade took a hit from stagnation in its main export market Europe and construction spending fell.
“The economic outlook has deteriorated considerably,” the SNB said. It trimmed its growth forecast for this year to just below 1.5% from a previous prediction of near 2%.
It cut its inflation forecasts for 2015 and 2016 to 0.2% and 0.5% respectively.
It kept its target range for the three-month Libor at 0.00-0.25%, as analysts polled by Reuters had all expected.
