SNB May Keep Rate on Hold as Franc Threatens Recovery

SNB May Keep Rate on Hold, Surging Franc Threatens Recovery
The franc has strengthened about 6.2 percent against the euro since June 17. Photographer: Adrian Moser/Bloomberg

The Swiss central bank today may keep borrowing costs on hold as the franc’s surge prevents policy makers from raising rates to fight inflation threats.

The Swiss National Bank, led by Philipp Hildebrand, will leave the three-month Libor target rate at 0.25 percent, according to 18 of 19 economists in a Bloomberg News survey. UBS AG is the only bank forecasting an increase to 0.5 percent. The central bank will publish its decision at 2 p.m. in Zurich.

SNB policy makers are weighing the risks of faster inflation against the danger that a stronger franc will undermine exports and hurt an economic recovery. Investors have snapped up the Swiss currency and other securities seen as havens on concern that the global recovery is losing steam. Japan intervened yesterday for the first time since 2004 to weaken the yen and protect the country’s recovery.

“It is the potential for a further substantial appreciation in the franc combined with a more severe global slowdown that is holding the SNB back for now,” said Dirk Schumacher, an economist at Goldman Sachs Group Inc. in Frankfurt. “We continue to expect the first hike in December.”

The Swiss currency was little changed against the euro today, trading at 1.3014 at 9 a.m. in Zurich. The franc has strengthened about 6.5 percent against the euro since June 17 when the SNB signaled that it will phase out its 15-month policy of countering franc gains through purchases of foreign currencies to protect exports and fight deflation risks. It reached a record of 1.2766 versus the euro on Sept. 8.

Japan, India

In Japan, officials were forced to weaken the yen after the currency’s strongest gain in 15 years threatened to stunt the nation’s recovery. The Japanese currency and the franc have both rallied in recent months on concern that the U.S. economy won’t maintain its growth rate and as Europeans grapple with the aftermath of the Greek debt crisis.

India’s central bank today raised its benchmark interest rates for a fifth time this year as strengthening economic growth threatens to fuel inflation. In New Zealand, South Korea and Malaysia, central banks kept rates on hold this month.

A stronger franc is making Swiss exports less competitive just as the European recovery loses momentum. Investor confidence in Germany, the biggest buyer of Swiss goods, fell to a 19-month low in September and growth in Europe’s services and manufacturing industries slowed in August.

‘Moderate’ Slowdown

So far, the Swiss economy is showing few signs of cooling. Leading economic indicators remained close to a four-year high in August and manufacturing growth reached a record in July. The Swiss government today raised its growth projection for this year to 2.7 percent from 1.8 percent and said it sees a “gradual slowdown” in the year’s second half.

The European Central Bank on Sept. 2 forecast the 16-member euro-region economy to expand about 1.6 percent this year.

Swatch Group AG, the world’s largest watchmaker based in Biel, Switzerland, said on Aug. 4 that it’s facing production bottlenecks in the second half after profit surged 55 percent in the six months through June.

The SNB will publish new forecasts for growth and inflation today and Michael Saunders, Citigroup Inc.’s chief economist for Western Europe, said in a Sept. 10 note that he expects the central bank to raise its 2010 growth projection from 2 percent. The SNB may also lower its inflation forecast for 2011 to 0.5 percent from 1 percent, he estimates.

‘Exit Strategy’

The SNB in June forecast inflation to reach 3.1 percent in the first quarter of 2013 if rates remain on hold. The bank aims to keep annual gains in consumer prices below 2 percent.

SNB policy makers are mulling “an exit strategy from monetary stimulus without either fueling a destabilizing credit boom or allowing an overly rapid franc appreciation to choke off growth,” Saunders said. “In this respect, the SNB’s statement is likely to lean more on the hawkish side.”

The central bank has held borrowing costs near zero since March 2009, boosting credit demand and stoking property prices. At their June meeting, policy makers said that developments in real-estate prices demand the “full attention” of the SNB, with Vice Chairman Thomas Jordan calling on banks to brace themselves for higher rates.

UBS economist Reto Huenerwadel says SNB policy makers will likely give a bigger weight to domestic price threats than risks posed by a stronger franc when assessing monetary policy.

“Wage inflation and a potential real-estate bubble are weighing heavier than the franc strength,” he said. The SNB “will put the emphasis on the risks of overheating in the domestic economy.”

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