SNB Keeps Rate on Hold as Franc Threatens Recovery

SNB Keeps Rate on Hold as Franc Threatens Recovery
The franc has gained about 6.3 percent against the euro since June 17. Photographer: Adrian Moser/Bloomberg

The Swiss central bank kept borrowing costs close to zero and lowered its inflation forecast, signaling it’s in no rush to raise interest rates anytime soon.

The Zurich-based Swiss National Bank, led by Philipp Hildebrand, today left the three-month Libor target rate at 0.25 percent. That’s in line with 18 of 19 economists in a Bloomberg News survey. The SNB cut its inflation forecasts through 2013 and introduced a line saying that the current policy stance is “appropriate.” Annual gains in consumer prices may not exceed the SNB’s 2 percent ceiling before the second quarter of 2013.

The franc depreciated the most since May against the euro after SNB forecast a “marked” economic slowdown in the second half of the year. Investors had snapped up the franc 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 its economy.

“The SNB is more cautious than we expected,” said Fabian Heller, an economist at Credit Suisse Group AG in Zurich. “The probability has increased that they will raise rates later rather than sooner. They continue to keep all options open.”

The franc weakened to 1.3267 per euro as of 3:57 p.m. in Zurich from 1.3153 before the announcement. A close at that level would mark its biggest one-day drop since May 19. The Swiss currency was at a record of 1.2766 on Sept. 8.

Inflation Outlook

The SNB in June 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. It said today that it would only take “measures necessary” if there was any “renewed threat of deflation.”

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

While a stronger currency is clouding the export outlook, it’s also making imported goods more affordable. Swiss inflation may average 0.7 percent this year and 0.3 percent in 2011 before accelerating to 1.2 percent in 2012, the SNB said. It had previously forecast inflation to breach 2 percent by the second quarter of 2012 if borrowing costs are kept unchanged.

‘Deflationary Tendencies’

The SNB said that the recovery “is not yet sustainable” and there’s a “possibility that inflation will temporarily turn slightly negative” at the beginning of next year.

“There are some deflationary tendencies mainly due to the strong franc,” said David Kohl, deputy chief economist at Julius Baer Group in Frankfurt. He now expects the SNB to raise its benchmark in June 2011 instead of in December 2010.

The Swiss economy may expand 2.5 percent this year instead of a previously estimated 2 percent, according to the central bank. The government today also raised its growth forecast for this year to 2.7 percent from 1.8 percent, projecting a “moderate” slowdown in the second half.

In Europe, Switzerland’s largest export market, the economy is already cooling. Growth in services and manufacturing industries weakened in August and exports declined in July. German investor confidence dropped to a 19-month low in September, reflecting concern about the economic outlook.

“The SNB can wait until the exceptional uncertainty and the run for safe havens have abated,” said Alexander Koch, an economist at UniCredit Group in Munich. “We keep our view that this is not likely to happen until spring next year.”

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