SNB May Keep Benchmark Rate on Hold as Japan Aftermath Adds Franc Pressure

The Swiss central bank may keep borrowing costs near zero to prevent the franc from appreciating further after Japan’s earthquake pushed the currency to a record, clouding export prospects.

The Swiss National Bank, led by Philipp Hildebrand, may keep its benchmark interest rate at 0.25 percent, according to all 20 economists in a Bloomberg News survey. The Zurich-based central bank will publish its decision at 9:30 a.m. tomorrow. Policy makers won’t hold a briefing.

The franc is appreciating as Japan’s quake adds to investor concern that the global economic recovery may fade in the wake of Middle East unrest and Europe’s fiscal crisis. While SNB Vice President Thomas Jordan said on March 3 the currency’s strength is posing “a lot of problems,” it is also helping counter inflation pressures by making imports cheaper and giving policy makers room to keep interest rates on hold.

“Unlike other countries, Switzerland is facing a very subdued inflation picture,” said Alexander Koch, an economist at UniCredit Group in Munich. “If the SNB went out on a limb and sounded too hawkish, it would risk sparking a rally in the franc, given global uncertainties.”

Franc Strength

The Swiss currency, which is considered a haven in times of turmoil, has appreciated more than 13 percent against the euro over the past year as European leaders struggled to contain the region’s debt crisis. It strengthened to an all-time high of 91.41 centimes against the dollar yesterday on concern a nuclear disaster is unfolding in Japan following the March 11 temblor.

The franc traded at 1.2801 against the euro at 1:29 p.m. in Zurich, up from 1.2830 yesterday. It was at 91.69 centimes versus the dollar.

The Bank of Japan (8301)’s pledge to secure financial stability and prevent investors from becoming more risk averse has failed to stem a plunge in global stocks. In Germany, Europe’s largest economy, investor confidence unexpectedly dropped in March. The benchmark Swiss Market Index (SMI) has shed 6.3 percent over the past week, bringing losses to 5.6 percent this year.

“Any threatening news in the aftermath of the earthquake in Japan or related to problems with the country’s atomic plants will immediately cause the franc to appreciate,” said Jan Amrit Poser, chief economist at Bank Sarasin in Zurich. “Given these circumstances, it’s very, very unlikely, that they raise rates tomorrow.”

Global Outlook

Worsening global growth prospects and retreating oil prices may prompt central banks to keep borrowing costs on hold for longer. European Central Bank council member Ewald Nowotny said on March 14 that policy makers are monitoring developments “very closely.” President Jean-Claude Trichet had signaled earlier this month that the bank may raise the benchmark rate as soon as April to fight inflation pressures.

Inflation in the euro area accelerated to 2.4 percent in February, the fastest in more than two years, the European Union’s statistics office in Luxembourg said today. In Switzerland, inflation may average 0.4 percent this year and 1 percent in 2012, the SNB forecast in December. Annual gains in consumer prices may only exceed the central bank’s 2 percent limit in the third quarter of 2013, according to quarterly projections. The SNB will publish latest forecasts tomorrow.

Jordan said on March 3 while there’s a need to fight inflation risks over the medium to longer term, increasing the benchmark rate “is not a question for today or tomorrow.”

‘Wary’

Eoin O’Callaghan, an economist at BNP Paribas SA in London, said the SNB may be cautious about raising its inflation forecast too much.

“In this environment, when the precise implications of the Japanese crisis are yet to emerge, and the currency is now just 3 percent off its record highs, we think the SNB will wary of sending too hawkish a message to the markets in its statement and inflation forecast,” he wrote in an e-mailed note today.

So far, the economy is weathering the franc’s surge. Investors grew more optimistic this month, leading economic indicators rose in February, manufacturing growth accelerated and unemployment declined. BAK Basel Economics said on March 10 the economy will grow 2.4 percent this year instead of a previously projected 1.7 percent. In 2010, gross domestic product rose 2.6 percent.

Near-zero borrowing costs and a strengthening economy have also fueled property prices in cities including Geneva and Zurich, home to some of the country’s largest companies including UBS AG (UBSN) and Zurich Financial Services AG. (ZURN) The SNB has said the real-estate market requires its “full attention.”

“The domestic economic situation clearly argues for a tightening in monetary policy,” Dirk Schumacher, an economist at Goldman Sachs Group Inc. (GS) in Frankfurt, wrote in a note. Still, “recent geopolitical tensions have increased the risk of safe haven capital flows into the franc -- we continue to expect the SNB’s first hike in September.”

To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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