Swiss National Bank (SNBN) President Thomas Jordan pledged to defend the Swiss currency ceiling “with utmost determination” after the central bank underlined the measure’s importance in protecting the economy.
The franc remains “high” and the cap of 1.20 francs per euro is “important in order to avoid an undesirable tightening of monetary conditions,” Jordan said in Bern today after the SNB kept the barrier in place. It also maintained the band for its benchmark interest rate at zero percent to 0.25 percent, as forecast by all 22 economists in a Bloomberg News survey.
The SNB’s foreign-currency reserves have surged to more than 400 billion francs ($435 billion) as policy makers stepped up euro purchases to curb flows sparked by the region’s debt turmoil. Still, while Jordan last month said negative rates and an adjustment of the cap were in the SNB’s toolkit if needed, the franc has weakened 1.9 percent this year and all 49 economists in a Bloomberg survey predict the franc will average higher than the cap in 2013.
“It’s very likely that the SNB hasn’t had to resort to interventions recently,” said Maxime Botteron, an economist at Credit Suisse Group AG. “The franc currently is probably less of a problem for Swiss exporters than it was in the past. They are more hurt by weaker growth globally.”
The franc traded little changed at 1.2331 per euro as of 12 noon in Zurich. Against the dollar it traded at 93.48 centimes.
“Overall, the value of the Swiss franc remains high and should fall further over the next few quarters,” Jordan said.
The SNB put the ceiling in place in September 2011 after investors pushed the franc close to parity with the euro, threatening to thwart growth and sink the economy into deflation. According to the SNB, without the cap Switzerland would have suffered a severe recession.
While the euro area, Switzerland’s biggest trading partner, is in its longest recession on record, the Swiss economy expanded 0.6 percent in the first quarter, beating economist forecasts as consumer spending drove growth.
The SNB predicted the Swiss economy to expand 1 percent to 1.5 percent this year, unchanged from its March forecast. Still, in the second quarter, the SNB has seen a “perceptible weakening” in growth, Jordan said.
“The risks for the Swiss economy remain high,” Jordan said. “Further developments in the euro area financial and sovereign debt crisis remain uncertain. Tensions can reappear at any moment on global financial markets.”
Inflation remains weak, with consumer prices suffering their their 20th straight month of declines in May. They are expected to decline 0.3 percent this year, the SNB said, compared with 0.2 percent previously forecast.
With Swiss consumer prices are in the midst of their longest slump in at least four decades, investors have shown that they take the SNB’s threat of supplementary measures seriously.
Jordan’s comments on the SNB’s “utmost determination” to defend the franc cap echoed previous SNB policy statements. Still, the phrase wasn’t included in today’s assessment. Jordan said this omission wasn’t a change in tone for the SNB.
The SNB president today reiterated that negative rates are in the central bank’s arsenal.
“We in Switzerland have always said that we won’t exclude any instruments that would help us maintain adequate monetary conditions,” Jordan said. “Adequate monetary conditions for the Swiss are of course influenced by steps are possibly taken in other currency areas.”
European Central Bank President Mario Draghi in May said policy makers had an open mind on a negative deposit rate and on June 6 listed it in a menu of options the ECB may deploy to aid the 17-nation economy.
Swiss home and apartment prices have soared in recent years, with mortgages kept cheap by the SNB’s easy policy. Keen to prevent a repeat of the property market crisis of the 1990s that hobbled growth for years, the SNB has sounded the alarm, warning of overheating and a decline in credit quality.
In February, the Swiss government followed a proposal by the SNB and introduced new capital rules that as of Sept. 30 require lenders to hold an extra 1 percent of risk-weighted assets linked to domestic residential mortgages. Even so, risks to Switzerland’s housing market, as measures by the UBS Swiss Real Estate Bubble Index, increased in the first three months of the year, raising the question as to whether authorities have taken sufficient steps.
“In the event of a further build-up of risks in the Swiss mortgage and real estate markets, it might prove necessary to take further regulatory measures,” SNB Vice President Jean-Pierre Danthine said, adding that it “will regularly assess whether an adjustment of the countercyclical capital buffer is required.”
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